There is no shortage of options when it comes to borrowing money over a short period. The most common options is a short term loan or a payday loan. Understanding how these two loan options differ, can help you decide which one is the best match based on your unique financial needs.
Understanding Payday Loans
Payday loans are financial products that enable you to borrow money, which is designed to carry you over until your next pay day. They are very short loans, usually for only a few days or weeks, usually used to cover any emergencies, such as urgent home maintenance or a car break down.
Payday loans are a good choice when you need money fast, but they are often expensive and include a high interest rate. As a result they are not always the best choice, especially as they are known to lead to financial difficulty, especially if you cannot repay them in time.
Payday loans are usually used for emergencies and as a result, you may not find you get the best loan option. The loan is to be repaid within thirty days in full, financial issues can jeopardise repayments and the higher interest rates make these very expensive, increasing the risk of default on repayment.
Understanding Short Term Loans
Short term loans, on the other hand, are different to payday loans, as they are taken over a longer period. Short term loans can last from two to twelve months, though they also come with a high interest rate and can be expensive. The interest rate for short term loans is less than a payday loan, as they are taken over a longer period. They are suitable for those with a good or bad credit score.
You will find that the application process for a payday loan and short term loan is similar. The lender requires the same details for both, which includes checking your credit record, your eligibility, confirming how much you want to borrow and for how long and offering a detail. It is important you take the time to compare loans and their interest rates, along with reading the term of the loan in detail, ensuring you fully understand the repayment schedule and your ability to make repayments on time.
Even though you probably need a loan quickly for an emergency, taking your time in your selection will ensure you choose the right loan that you can pay back with confidence.
Which is More Expensive?
Most people are under the impression that a payday loan is more expensive, but this is not always the case. In some instances a payday loan can work out cheaper in the long run, as they are paid back over a shorter period, reducing how much accumulated interest is incurred.
Both payday loans and short term loans have similar interest rates, so they shouldn’t be too different in price. The difference is based on how long you choose to borrow the money for. If you borrow a set amount over six months, it will work out more expensive than if you had chosen two months, for example.
Repayment of Payday Loans vs Short Term Loans
Repayments change based on how much you want to borrow and how long you want to make repayments. Short term loans offer a longer repayment schedule than payday loans. In some cases you may find that the first repayment is lower and then the remaining amount is spread over the time taken to repay, which is agreed in advance. Short term loans, you make repayments monthly, on the same day each month. Payday loans, on the other hand are repaid on a certain date, which is usually a day or two after your salary reaches your bank account.
You may be able to pay a payday loan back at any time, based on the agreement signed. This enables you to make payments to reduce the total amount which is to be paid by the end of the agreed term.
We have only done a brief summary, for more information we recommend this article by Money Guru.