Should you consider a personal loan over a payday loan?

Should you consider a personal loan over a payday loan?
November 8, 2016 Lauren Howells
personal loan or payday loan

When you are thinking about taking out a loan, the amount of different options available can feel intimidating. Do you want a personal loan or payday loan?

Do you want a personal loan or payday loan?

First of all at CashLady, we understand how important it is for you to choose the best loan that suits your circumstances.

Should I look for a personal loan or payday loan?

Every type of loan has its own set of advantages and disadvantages. So to decide whether you should take out a personal loan or payday loan, it is important to understand what these are.

What is a personal loan?

A personal loan generally allows you to borrow larger sums of money over a longer period of time. They are not usually short term loans. People usually use these type of loans when they need to buy something big like a car.

Should you get a personal loan or payday loan for a car?

They can also be useful if you want to carry out home improvements.

A personal loan can also be used to consolidate existing debts into one loan. Although it is worth noting that you could end up paying more if you do this.

Personal loans can mainly be found  in banks or credit unions.

Secured loans

Secured loans are loans secured against something you own to guarantee the loan. In the case of a mortgage, this would be your house.

To get a secured loan, the asset you want to use as a guarantee must undergo valuation. In the case of a mortgage application, someone would come to value your house.

If you fail to repay the loan, your asset could be taken off you. The loan provider could then sell your asset to get their money back.

What are the features of a secured loan?

A secured loan will generally offer you a larger amount of money than any other type of loan. They usually have longer repayment terms and are not usually seen as short term loans. They can take 25-30 years to repay. Also, they generally have lower interest rates.

Interest rates can be fixed or variable, depending on the loan you go for.

This type of loan can be useful if you want to borrow more money over a longer period of time.

Yet, to get this type of loan, you have to have a valuable asset such as a house.

Unsecured loan

An unsecured loan is the opposite of a secured loan. You do not need an asset to guarantee the loan.

Unsecured loans are much more commonly used than secured loans.

Loan providers will mainly look at your credit history to see whether you can have this type of loan. If you do not keep up to date with your repayments then this could affect your credit rating.

What are the features of an unsecured loan?

The amount that you can borrow is smaller than that of a secured loan.

The payment terms are usually shorter than a secured loan – usually around 5 years. Unsecured loans also tend to have higher interest rates.

The advantage of this type of loan (as opposed to a secured loan) is you do not have to own any property or asset to be approved.

You could use this type of loan to pay for things such as a holiday or a wedding.

What are the the different types of personal loan?

Personal loans mainly fall into two different categories:

Fixed rate personal loans

A fixed rate personal loan is a type of loan where you will pay a fixed amount of money every month.

The advantage of these type of loans is that you will know how much you can expect to pay every month and can budget accordingly.

Most personal loans are fixed rate loans.

Variable rate personal loans

The interest that you pay may change on variable rate personal loans. This could be because of the Bank of England base rate or general market forces.

The advantage of these types of loans is that the amount you pay each month could go down. But, it could also go up.

This means that you may not be able to budget effectively at all times and could end up unable to pay the amount you need to.

What does APR mean?

APR means annual percentage rate. Unsecured loan providers use this to describe what you will pay back on your loan, including any charges.

You can use the APR to calculate how much money you will pay to borrow your loan.

APR is a useful way to compare loan costs on a like-for-like basis. Resulting in easily seeing which loan may be best for you.

What does representative APR mean?

By law, 51% of people who get the loan have to be given the rate advertised or below the rate advertised.

Sadly this means that you may receive a higher APR than you see on the adverts when you apply for a loan.

What are guarantor loans?

Guarantor loans are a type of unsecured personal loan. You can usually borrow up to £5,000.

A guarantor loan will need a guarantor to sign the loan agreement with you. The guarantor is agreeing to guarantee the loan by saying that they will repay the loan if you are unable to repay.

Do you need a guarantor for a personal loan or a payday loan

Guarantor loans can be useful for people who have a poor credit history. Yet, it can be difficult to find someone who is willing to guarantee a loan for you. Often guarantor loans can also put a strain on your relationship with the guarantor.

What are early repayment penalties?

If you want to pay off your loan early, you may be subject to early repayment penalties. When you take out a loan, you will have a 14 day cooling-off period to change your mind about taking out the loan.

Make sure to check your loan terms if you think early repayments are something that could affect you.

What is a payday loan?

A payday loan is a type of short term loan. Payday loans are short term because they are usually paid back over a period of 1 month or less.

Payday loans are usually paid back in one lump sum on your next payday. This is different to many personal loans which are usually ‘instalment loans’ and are commonly paid back in instalments over months or years.

Why get a payday loan?

  • Fast access to cash

A payday loan can be useful if you find yourself in need of cash, urgently. Many payday loan providers are able to make a decision on your application within hours. However decisions for personal loans can take much longer.

Although some lenders do carry out credit checks, some do not. If lenders conduct ‘hard’ searches, these would leave a ‘footprint’ on your credit record. On the other hand, ‘Soft’ searches would not leave a footprint on your credit record.

Unfortunately having many credit checks could adversely affect your credit rating.

What if I want to borrow money for a longer period of time?

Other short term loans allow you to pay back in instalments. This is instead of the traditional payday loan ‘one re-payment after your payday’ model.

The length of these short term loans is usually between three and six months. There are short term loans that last as long as 18 months.

Why use a short term loan comparison site?

A comparison site such as CashLady allows you to apply to a panel of lenders for a short term loan.

As a result, it means that you have an increased chance of getting approved for a loan than if you were just to apply to one lender.

Some alternatives to personal loans

Overdrafts

Overdrafts can be useful if you only need a small amount of money. Some banks offer interest free overdrafts.

But, there can be penalties so make sure you understand the terms and conditions.

Credit cards

Credit cards can be an option if you need to borrow money. Some even offer 0% interest for a period of time.

Yet, you will usually need a good credit history if you are going to get approved for a credit card. As a result the application process can take longer than applying for a payday loan or other short term loan.

Balance transfer cards

If you have debt, you could transfer it to a credit card. Again, you will usually need a good credit rating to do this.

Conclusion

When you are choosing between a personal loan or payday loan, you should think about what you want out of the loan.

Do you want a larger loan that you can pay back over a longer period of time? If so, a personal loan may be a good option for you.

You may even want a loan period of less than 6 months or a loan that you only pay back in one instalment after you get paid? If so, a short term loan or a traditional payday loan might be right for you.

Ultimately it is important to check the loan terms of any loan you want to take out so that you can be sure that it is the right choice for you.