Less than half of Americans can pay for an emergency that costs $1,000 or more.
To remedy this, many take out loans to cover the cost of unforeseen emergencies or accidents. This leads to more financial stress and worry because you don’t always know which loan is best.
If you’re thinking about taking out a loan, here’s a handy guide to the differences between a personal loan vs. payday loan.
Why Take Out A Loan
Taking out a loan isn’t an easy decision to make, there are times when it may be necessary. Here are some reasons why people decide to get a loan:
- Catch up on bills
- Pay for medical bills
- Home repairs
- Debt consolidation
- Vacations, wedding, or other major life events
While these are some of the main reasons why people turn to loans, it’s not an exhaustive list. Getting a loan can be a very personal decision and both personal loans and payday loans are great choices.
So what is a personal loan? A personal loan is just one of the many loans you could apply for. Here are some reasons why a personal loan might be right for you.
Above all, personal loans are very flexible. They meet personal needs like debt consolidation, paying for life events, cars, or home repairs. They’re not like a mortgage loan, where it has a specific need.
When you apply for a personal loan you’ll likely need a credit score of 600 or better. Some lenders will allow you to borrow but at a higher interest rate. The life of a personal loan can be anywhere from a couple of years to five or six years, and the amount borrowed a couple of thousand dollars to over $10,000.
Personal loans do have some caveats, but otherwise, they’re easy to acquire and have a fixed payment. You’ll need proof of income, a credit score, and you’ll need to know how much to borrow. Here’s a better understanding of how you can get approved for a personal loan.
What is a payday loan? In comparison, payday loans are a quick way to get cash, but they come with some higher stakes.
The amount you can borrow is much smaller, between $500-1,000, and are typically used why you’re in a pinch for money. They’re not a solution to a long-term problem.
You will need to pay a payday loan back in two weeks to 30 days. One of the advantages of payday loans is that there’s no credit check, so if you need the money and have lower credit, it might work for you.
However, the interest rate is extremely high, 400% or higher, so you’ll need to ensure that you can pay everything back quickly. If you cannot, it’s possible to trap yourself in more debt by rolling over the loan.
Personal Loan vs. Payday Loan
When you’re deciding between a personal loan vs. payday loan, your main focus should be the loan’s purpose. Once you understand why you need the money, you’ll make the right choice.
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