Payday Loans Vs Traditional Loans

A payday loan, as most of us would know, is simply a short-term financial alternative to temporarily bridge or meet the expenses that cannot wait till the next payday. The loans are gaining quite a lot of popularity mainly because of the high overdraft charges levied on bank accounts, making it quite important for account holders to carefully monitor their account balances, even if funds are required for emergencies or unavoidable circumstances.

Payday Loans Vs Traditional Loans

A theoretical comparison may be useful just to get aware of the basics of these loans. However, in reality the loans do serve different purposes.

Term and Interest Rates

Payday loans are real short-term loans. It is a personal loan that offers instant cash in almost an hour in a few cases, of course at seemingly exorbitant rates (up to 200 per cent), which eventually translate to a nominal repayment amount when the term is considered.

Traditional loans are long-term loans at fixed rates of interest and may or may not be subject to changes over time. The loans take at least a month’s time to get cleared as there are several procedures and approval processes that need to be addressed. It, therefore, may not really help in case of real emergencies that are time-critical or when a borrower is in need of some cash within a few days.

Paperwork and Processing

Payday loans require very simple and straightforward paperwork. These loans are offered by almost any lender, right from cash counters to websites. The loans are purely based on the repayment capacity of the borrower, with to borrowings and repayments. Proof of employment, however, is required to support a payday loan as the loan is simply secured against the next pay check. Loans are cleared absolutely no emphasis on the credit history or any other past financial performance with regards within a day’s time with online applications being processed even faster.

Traditional loans are the forte of established banks and lenders, who offer long-term personal loans to individuals after an elaborate application process, the request being subject to careful scrutiny. These are secured loans with the money being lent out against collateral and supported by other documents such as proof of assets, income, and tax returns to ascertain the net worth of the borrower.

Loan and Repayment Amounts

While payday loans are often subject to credit limits (maximum £750) based on the individual’s earnings, conventional loans allow larger funds that commensurate with the value of the collateral, financial status and the credit rating of the borrower.

Payday loans are usually repaid at the end of the month, while long-term loans require regular interest payments over the term of the loan, in addition to a final payment at the end of the term.

Employers also offer payday loans to their staff, making the process even easier. However, the interest rates should fall within pre-set limits to claim exemption from Consumer Credit Act 2006 (CCA). Availing payday loans from employers certainly eases the process of repayment, as the charges and interest amount are automatically deducted at source before the pay gets credited.

It is for the borrower to decide on the appropriate loan based on the amount that is required and the purpose of the loan, cost of the loan, security and interest rates being only secondary factors influencing the decision.