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If you’ve ever had a bank account, you’ve probably heard the term “personal loan” or the term “payday loan” before. But, to be honest, sometimes finance lingo can be needlessly confusing. Plus, it’s not like we learn about this stuff in school anymore (though I think we really should).
Don’t worry, I’m going to walk you through the differences between these two loan types, what to use them for, and the best tips and tricks out there for maximizing your money game.
What is a personal loan?
In the most basic terms: personal loans are a type of debt that allows you to obtain a lump sum of money. With a personal loan, you can borrow money to use for a variety of purposes. When obtained from traditional banks, credit unions, and online lenders, personal loans can typically range from $1,000 to $100,000, and typically come with terms from two to seven years.
Personal loans are usually less expensive than credit cards but some may have a higher interest rate, which is worth considering when you’re choosing the loan that works for you. Generally, when you’re thinking about the concept of “taking out a loan” you’re thinking about a personal loan. See what I mean about things being needlessly complicated? You’ve got this.
What can you use a personal loan for?
Personal loans can be used for almost anything you can think of. From wedding planning to home renovations. Personal loans have longer repayment periods than other types of loans, so if you’re going to need a generous amount of money and some time to pay it back, this is likely the option you’ll want to go with.
What is a payday loan?
A payday loan is simply a short-term cash advance. Look to this type of loan if you encountered an emergency or needed to cover monthly bills while waiting for your paycheck.
With a payday loan, the borrower (you) agrees to pay the loan back by giving your lender a personal check to cash on an agreed-upon date. You also have the option of giving a lender electronic access to your bank account so that they can take funds directly from your next paycheck.
The main difference between a personal loan and a payday loan is that payday loans use access to your next paycheck as a guarantee that you’ll pay the loan back in a timely manner.
The application process for a payday loan is usually quick and simple. Some payday lenders can transfer funds into your account as soon as the next business day. Of course, this will be dependent on your individual circumstances.
What can you use a payday loan for?
Payday loans are specifically meant to help cover bills or emergency expenses until your next paycheck. A payday advance is right for a person that needs quick access to cash that they know they’ll be able to pay back quickly.
To be clear, a payday loan is not right for you if you just need a little extra cash for incidental expenses. You should only use this type of loan as a tool to meet short term financial needs, not as a long-term financial solution.
What’s your best option?
When it comes to choosing the correct loan type for your situation, it’s important to take a look at your overall finances, the interest rate on the loan, and what you are looking to use the loan for. If you just need to handle a sudden bill, payday loans might be the right choice. If you’re looking to fund a wedding or fix up your house, consider a personal loan. Overall, you want to make sure to choose a loan that you know you’ll be able to pay back, and one that suits your needs. Wondering where to get started? Check out some of our favorite options for personal and payday loans!