Picture this: your monthly salary is yet to arrive, which would have been the only amount you would have on your dried-up bank account. Suddenly, an urgent expense needs to be settled. But as it stands, you don’t have enough cash to meet the demand. What do you do?
You’ve likely been in this very situation many times over. Luckily, there are a lot of options that you can take when you need to borrow money instantly. Two of which are the most prominent choices–payday loans and personal loans.
But for a financially conscious human being such as yourself, what should you choose to get yourself the loan that you need? In this article, we explore the difference between personal loans and payday loans, the pros and cons between the two loan types, and which is a better choice based on your specific situation.
What’s the difference between personal loans and payday loans?
When faced with an urgent need for financing with your next payday quite far off, the first thing to consider is the difference between a payday loan and a personal loan, and have a deeper understanding of the two loan options.
A personal loan is a loan you can take out for just about any of your personal expenses. You can use a personal loan for debt consolidation, quick purchases, home renovations, as a small substitute for business loans, and many more.
A personal loan can either be secured or unsecured, which pertains to requiring collateral. It is a lump-sum loan with a fixed APR that is repaid in the standard fashion of fixed monthly payments over a duration that typically lasts from two to seven years.
Similarly, a payday loan can be used for urgent financings, like settling bills and other payments. A payday loan is a short-term loan that will usually have a small loan amount. This amount requires no collateral like other unsecured loans and is typically repaid within a short time period along with a fee.
Payday loans are called as such as the usual repayment period is within two weeks– the arrival of your next paycheck. Since payday loan repayment terms are so short, they’re often “rolled over” when you miss a repayment window (i.e., borrowed again for an additional fee).
How do payday loans work?
Treat a payday loan as if you get a cash advance on your salary for a few weeks or days, making it a short-term loan. This is typically very easy to do because a payday lender will usually forego a credit check, only requiring proof of your income to ensure that you can make your repayment.
This means that a payday loan amount and fees need to be smaller than your monthly income/your next paycheck, as such you shouldn’t expect it to cover major expenses. A payday loan will also have a high-interest rate, which is something you should carefully consider before applying.
Pros of a Payday Loan
You can quickly get a payday loan in case you do not have sufficient funds and you need to immediately settle an expense.
No credit check.
Most payday loans won’t require a deep review of credit scores. You can borrow money even with poor credit and existing debt.
The flexibility of use.
Like personal loans, payday loans can be used for many different purposes, such as emergency medical bills or your daily expenses if you don’t have enough money.
Cons of a Payday Loan
Lower loan amount than personal loans.
The flexibility of its utility can be mitigated by the small loan amount.
Short loan duration.
Borrowers may be unable to make payments during the repayment duration, which maxes out at around two weeks.
Falling into debt.
The inability to meet payment schedules on your payday loan due date risks your debt snowballing into higher amounts. This is because many lenders will charge a finance fee when you miss payments on your payday loan. Coupled with high-interest rates, this can worsen already bad credit and can do more harm than good if you want to use it as a debt consolidation loan.
How do personal loans work?
Personal loans are installment loans at their simplest. They are offered by different lending companies/loan providers, from banks to licensed money lenders and credit unions. By going to these institutions, you may apply for a personal loan and they will review your credit score and debt-to-income ratio.
The Monetary Authority of Singapore (MAS) limits how much you can borrow up to 12 times your monthly salary across all unsecured credit facilities. A personal loan can either be a secured or unsecured loan, with the latter providing smaller amounts and generally stricter requirements.
You also get a longer repayment schedule than payday loans, from 6 to 12 months for moneylenders and 2 to 7 years for banks with a reasonable annualized interest rate.
Pros of a Personal Loan
Personal loans can be an excellent alternative to going into deep debt and waiting for a payday. This is especially useful for people who have been hit hard by looming expenses you can’t pay off.
It’s also a good option for someone with a bad credit rating who don’t have access to traditional loans. And the process is relatively easy: You apply for the loan through an authorized lender, give them your payment history and other information and they issue you a loan check.
The flexibility of use.
When you take out a personal loan, the money you borrow isn’t tied up in a specific asset and you have the option to use the money for anything you want.
In theory, this affords both borrowers and lenders the opportunity to customize loan terms and conditions to suit your needs, which makes it a more appealing option than payday loans. You can use it for medical bills, pet medical expenses, helping repay your student loans, and more.
Larger loan amounts than payday loans.
One of the major advantages of taking out a personal loan is that you can borrow more money. You can get a personal loan up to the limit of your credit card limit.
You may have trouble getting this loan if you have poor credit or don’t have any credit at all, but government-backed loans are typically capped at 12x of what your monthly salary is at the time of application and must be repaid after paying off any outstanding balance.
Longer repayment periods.
A personal loan allows you to line up several small payments and pay off the entire loan in instalments over a set repayment duration. Payday loans usually require the borrower to pay off the entirety of the loan in one month.
When it comes to personal loans, you’ll always know how much to budget what you owe for each month due to the fixed payments.
Cons of a Personal Loan
Interest rates on personal loans may not reach the levels of a payday loan, but they can still be very high. You may have to pay personal loans back through higher interest charges.
Stricter requirements than payday loans.
Many legal lending companies have stringent rules about who can apply for a personal loan. The strict requirements include reviewing the debt-to-income ratio, credit rating, and more, and it can make it difficult for people who are struggling financially to get a loan. Payday loans are more lenient in that they will only check your monthly salary.
Inability to pay affects your credit score.
The inability to pay off your personal loan can have serious consequences on your credit score. The longer it takes to pay off the loan, the lower your score will get. And the lower your score is, the harder it is for you to get approved for new credit or mortgages.
Things to consider before applying for a personal loan or a payday loan
Check your credit score
The last thing you want is to wind up with a negative credit score that takes away from your ability to acquire a personal loan.
For this reason, it is vital that you understand your options as soon as possible. The sooner you identify and improve your credit score, the less likely you are to experience financial problems when applying for new credit in the future.
Check your eligibility
Before getting a payday loan or a personal loan, it’s your responsibility to understand what’s required of you if you choose to use one of these methods of debt relief.
There are restrictions and requirements that you need to fulfil in order to be taken care of by your chosen loan provider.
Calculate how much you need to borrow
It’s important to heavily weigh your income and expenses with how much money you want to borrow, because the inability to pay may cost you more in the long run. Careful consideration of the principal will no doubt help you save money.
There are three steps to determining how much money you need to borrow. The first is to calculate your available credit. This includes what is left over after paying off any debt you have, any cash you have available for immediate consumption and any investments you’re making.
Next, factor in interest charges, which will vary based on the type of loan you’re applying for and whether you’re approved or denied.
Finally, take into account any fees and costs associated with getting approved for a loan, including those associated with setting up your account and completing documentation.
Shop for options
Whether it’s personal loans vs payday loans or any other type of loan, don’t jump at the first loan you find. Ask any loan advisor: it’s always best to take a look at your different loan options before making a decision, to make sure that you don’t miss out on better interest rates and terms.
Applying for a personal loan or payday loan
Eligibility and Requirements
Banks, and personal and payday lenders will typically have their own set of requirements especially when it comes to reviewing credit eligibility, but they generally follow the same
Personal & Payday Loans
The eligibility and requirements of a personal and payday loans from different moneylenders include but may not be limited to:
- At least 18 years old
- Minimum monthly income of S$1,500 for citizens and permanent residents; S$2,000 for foreigners
- Proof of income and employment
- Proof of residence
- SingPass to log in to CPF, IRAS, and HDB websites
- For foreigners: Passport, work permit, proof of residence, proof of employment, proof of income
The eligibility and requirements of a personal loan from different banks include but may not be limited to:
- At least 21 years old
- Minimum annual income: at least $20,000 for Singapore citizens, at least $40,000 for foreigners
- CPF statement/Income tax statement/Payslips
- For foreigners: Having an active Singapore Work Pass (PEP, S-Pass, or employment pass)
Alternative financing options
Accessing money for the things you really need can be difficult. Credit cards can open a floodgate of temptation that puts tremendous pressure on your wallet unless you can resist it. Remember–credit card debt is nothing to scoff at.
But with the right mindset, this can be an excellent alternative to other loans. Additionally, credit cards don’t require pre-approval, and you can repay your debt when you’re ready.
How can I decide which type of loan is right for me?
When it comes to personal loans vs payday loans, personal loans are a more ideal option of financing with the larger principal offered, longer terms, and comparatively lower interest rate charges. There are only a few instances where a payday loan should be considered. These include not qualifying for the annual income requirement and the inability to access credit cards.
So when choosing between a personal loan and a payday loan, it’s worth looking at your specific situation, most of all. But you don’t have to do it alone–let Instant Loan help.
Instant Loan is a loan comparison service that helps you find a financing option that caters to your specific need by giving you a list of the best loans from the top licensed moneylenders in Singapore best suited to address your situation.