Payday loans offer a popular form of borrowing, with as many as 12 million Americans estimated to take out a payday loan each year. However, they differ from different types of loans in several key ways, including loan term length, interest rates, and repayment terms. There are several other loan types available aside from payday loans. This guide will delve deeper into the nature of payday loans and describe how other financial products differ to payday lending.
What Is A Payday Loan?
According to the Consumer Financial Protection Bureau, a payday loan is classified as a short term, high cost loan, which is typically due on your next payday and is generally for $500 or less. Due to these types of loans being short term, typically with a repayment period of 1 month, there is higher interest on these loans than your average personal loan. Payday loans are often taken out by individuals with low income, who have a bad credit score, meaning they cannot get a traditional loan from an institution, or by individuals who need access to quick same day loans.
How do Payday Loans Differ from Other Types of Loans?
Personal Loans
The loan type with the most notable difference is a personal loan. With a personal loan, amounts borrowed can range from $1000 – $50,000 and can be paid back over several years with a much lower interest rate than payday loans. Payday loans are generally are repaid within 2-4 weeks, with the average loan amount being $500. With personal loans, the average interest can range from 6% – 36%, whereas with payday loans, the average interest charged can sometimes be much higher.
One primary reason why an individual would opt for a payday loan over a personal loan, is that they are able to borrow money instantly, providing they fit the correct criteria, such as having a steady source of income, being over 18 years of age and having a suitable bank account for the funds to be deposited into. If you are looking to borrow money online, payday loans can be a quick route to cash. However, if they are not paid in a timely manner, the debt you borrow could end up spiralling due to the high interest rates.
Installment Loans
If you are looking for another alternative to a payday loan, you may want to look into installment loans. Unlike a payday loan, installment loans can be taken out over a typical period of 3,6,12 or even up to 60 months. Because these loans are payable over a longer time period, it means that an individual has more time to get their finances in order before paying back the full cost of the loan.
Installment loans can be used for personal use, such as buying a new car, paying for a holiday, or home repairs, but can also be used for business purposes, such as paying your staff or even paying your tax bill. You are able to take out an installment loan even with bad credit, as long as you meet the criteria of the lender.
Title Loans
A further alternative to a payday loan is what’s known as a title loan. These loans are just as risky as payday loans, with an added exposure being that you are typically using your car as collateral. With title loans near me, a lender will appraise the value of your vehicle and offer typically 25% to 50% of that as a loan, at an average interest rate of 300%. This means that you can borrow more if you take out a title loan than a payday loan. This will also typically be at a lower interest rate, and over a 30 day term rather than a 14 day term on average.
Because a lender has to appraise your vehicle to offer you a title loan, you typically have to visit the lender in person. This is completely different to a payday loan, where money can be borrowed online and can be in your bank account on that same day if successful. Title loans will in most cases not affect your credit, even if you are unable to repay the loan. This is because your vehicle is used as collateral, which will then be sold. So in this scenario, your debt will not be passed to a collection agency. In order to get a title loan, the vehicle will often need to be owned in full. However, some lenders will allow you to get a title loan if you have paid the majority of the finance of the vehicle.
What Are Other Alternatives to Payday Loans?
If you want to avoid payday loans, or their alternatives, then there are some other routes you can go down. These include visiting a community bank, who in some cases can offer small loan amounts with easier repayment terms than larger banks. You could also try and get a loan from a credit union. These institutions can offer payday alternative loans (PALs), which can be significantly less expensive that payday or title loans.
Another potential route is to ask friends or family for help. You may draw up an agreement that allows you to pay them back over a longer period of time at a lower interest rate (or sometimes no interest rate at all). Or perhaps you could even look to go to your local church or charity, who often offer financial help for members who are going through a rough time financially.
Payday loans should only really be used if they are absolutely needed. They have high interest rates, which can lead to financial trouble if they are not repaid fully and on time. However, if these loans are needed, they can be paid out on the same day, and are helpful for those who have bad credit and cannot get a traditional loan.