Personal Loans vs. Payday Loans: 10 crucial differences you need to know | Mint
Source: Live Mint
If you are short of funds and urgently need money to cover an unanticipated expense, you can rely on a personal loan. Although personal loans have lately caught a fancy with the young people in India there is another category of loans which are gradually foraying into the middle class ecosystem. We are referring to the pay day loans, which are quite similar to personal loans but still vary in terms of interest rate, loan amount and repayment period, among other criteria.
For those who are unaware, instant personal loans and payday loans are both short-term financial products which are aimed at providing quick funds. They, meanwhile, differ considerably across various parameters such as purpose, size of loan, repayment, and eligibility criteria.
Key differences between personal and pay day loans
1. Purpose: Personal loans are offered by banks, NBFCs, or digital lenders, usually for general purposes whereas payday loans are very short-term loans that are designed to cover urgent expenses until the next salary is credited.
2. Amount of loan: Personal loan typically ranges from ₹50,000 to ₹25 lakhs whereas payday loan is of smaller amount usually ₹1,000 to ₹1 lakh.
3. Tenure: Personal loan is given for anywhere between six months to five years whereas pay day loan is given for tenure between 7 to 30 days. This is aligned with the borrower’s payday cycle.
4. Interest rate: Personal loan charges a lower interest rate typically 10–24 percent per annum whereas pay day loan charges a higher interest that ranges between 36 percent to 60 percent.
5. Processing fee: The fee of processing a personal loan typically varies between 1–3 percent of the loan amount whereas payday loan charges a fixed fee or high percentage of loan amount (e.g., ₹500 to ₹1,000 for small loans).
6. Repayment: The repayment of personal loan is given in form of monthly EMIs over the chosen tenure whereas pay day loan repayment is typically expected on the day of next salary.
7. Eligibility: Personal loan is offered to both salaried and self-employed individuals whereas payday loan is given primarily for salaried individuals with a regular income.
8. Criteria: In order to secure a personal loan, one requires proof of income and stable financial background. On the other hand, a payday loan requires proof of salary or upcoming paycheck.
9. Credit score: Personal loan is heavily dependent on a high credit score (more than 700) whereas payday loan can be given to individuals with lower credit scores, but at a higher cost.
10. Lenders: Personal loan can be given by the lenders such as banks and NBFCs whereas payday loan is often given by fintech companies and there is a stricter regulation by the regulator i.e., RBI.
