Unexpected events happen regularly and many times, people are forced to look for cash to save the situation. Some circumstances that require quick cash include sudden funerals, home and motor vehicle repairs. Over the years, money lenders have diversified their products to cater to the insatiable demand for quick loans.
Payday loans and short term loans are popular solutions to financial emergencies. Both products are popular due to fast processing times, suited for emergency purposes. As you shop for the perfect loan, it is imperative to differentiate both types of loans and make an informed decision.
Just like the name suggests, this loan service extends credit to borrowers to be repaid in one lump sum repayment from the next salary or payday. They have a very short repayment period, usually one month and attract very high-interest rates.
These loans are popular among people with poor credit ratings. They are not strict on poor credit scores but rather focus on identification documents, proof of a monthly salary and a bank account. Additionally, these loans are almost instant, taking just a few hours to be availed to the borrower.
Short Term Loans
Like payday loans, short term loans are sought by people looking to take care of emergencies and are paid over a short period, usually anywhere between one month and a year. Due to the short repayment period, they attract high-interest rates compared to regular loans.
Short term loans may be advanced with little or no collateral and like payday loans, they only require a valid proof of employment, identification documents and a bank account. They are popular for their simple application process and fast disbursement of cash.
Differences between Payday Loans and Short Term Loans
While these two types of loans are strikingly similar, it is important to differentiate between the two, to pick an option best suited to your financial situation. Get your facts right as a default in payment can damage your credit score and trap you in a vicious cycle of borrowing to mitigate the high-interest rates, penalties and fines.
The major difference between both types of loans is the duration time provided for payment. While payday loans are repaid in one month, short term loans are more flexible with payment plans ranging from a few weeks to a year.
Both are high-interest-rate loans, but payday loans attract significantly higher interest rates that can leave the borrower in a financial rut if they are unable to pay back the money within the stipulated period. Short term loans have slightly friendlier interest rates due to a longer repayment window.
Payday loans are usually smaller amounts compared to short-term loans and are not favorable for borrowers looking for large sums of credit.
Payday loans are high-risk loans compared to short-term loans due to short repayment periods coupled with high-interest rates. Longer repayment periods make planning for short term loans easier and reduce default rates.
While both types of loans are convenient and give a lifeline out of desperate situations, make sure you can repay the loan to avoid financial problems.