Personal Loans vs Payday Loans vs Credit Cards

You can never tell when you’d be put through a financial crisis. And sometimes, situations that need only a small amount of money can also be challenging if you don’t have that much of money in your account. Under such circumstances, opting for a conventional loan makes least sense. You’d have to wait for a long time to acquire cash. Why would you wait when you can get instant cash within a day to take care of the crisis situation?

It’s always wise to assess each option that you have when you need instant cash. So, for urgent cash needs, you can consider three options- personal loans, payday loans, and credit cards. But what’s the best option out of these three? Here’s everything about personal loans, payday loans, and credit cards, and what’s best for you.

When Do Personal, Payday, And Credit Card Loans Make Sense?

All three kinds of loans are the best option when you need instant cash. The money that you get through these kinds of loans can be used for emergency situations when you don’t actually need too much money to take care of the situation. Whether you’ve made a last-minute plan to commute, need to meet unplanned medical expenses, or need to pay a bill, personal, payday, and credit card loans can help you in doing so.

Some lenders also categorize their short-term loans into specific needs. For instance, if you’re applying for a loan to meet educational expenses, it would have its own categorization. However, that’s not always the case. Nevertheless, a payday loan, personal loan, or a credit card has the instant cash needs covered if you meet all the criteria that differ for the kind of loan and lender.

Now that you know when it’s suitable to apply for a personal, payday, or credit card loan, you should know about each of these loans in detail so that you can decide what’s the best available option.

What Are Personal Loans Like?

Personal loans are short-term loans that you can acquire without having to provide collateral since it’s an unsecured loan. With conventional loans, the biggest headache is that you have to provide collateral, and if you need a small sum of money, it doesn’t even make sense. Personal loans can be quite helpful in dealing with small expenditures when you don’t have cash in hand.

A lender generally assesses your credit score, various documents, and if you’re capable of repaying the loan or not. Upon checking all these factors, you may get a personal loan. One of the benefits of going for a personal loan is that not a lot of documents are involved. Based on the tenure of the loan, you can also pay them in installments.

While the interest rates are fixed, it would still depend on your income, occupation, credit score, and tenure. That being said, the rates are still not floating rates. The tenure depends on your needs. If you decide to repay the loan amount and the interest in installments (which is mostly the case,) the sum of money to be paid in each installment depends on your loan amount.

The Downside

One reason why a lot of people fail to get a personal loan is that lenders check credit scores. If you have a bad credit history and still desperately need money, a personal loan wouldn’t come to you. So, despite having so many advantages over conventional loans, personal loans can be inaccessible for people with a bad credit score. When that’s the case, you can’t help but look for a different option where you have the liberty to acquire a loan without the lender assessing your credit scores.

What Are Credit Card Loans Like?

A credit card loan is also an unsecured loan that lets you use your credit card to meet certain expenses either when you’re out of cash or when you don’t want to use cash for the transaction. When you purchase something or meet a certain expense, you need to repay the loan amount within the grace period. When you fail to do so, the interest incurred on the loan amount can be quite high.

When you seek a credit card loan, the lender would generally check the credit scores to decide whether or not you qualify for the loan. The credit score also helps the lender in deciding what can be your credit card limit. This means credit scores play a crucial role here as well.

Why Are They Better Than Personal Loans?

One thing with credit card loans is that they are quite convenient and secure. While credit card loans demand a good credit score, pretty much like personal loans, they’re better because you can acquire credit card loans even if you have a bad credit score. For this, you would have to get a secured credit card loan. If you want your credit card to have a certain limit, let’s say $400, you would have to deposit $400 so that in case you fail to repay the loan, the lender can seize the collateral amount.

The Downside

Though people with bad credit scores can also acquire a credit card loan, it comes with a catch of having to deposit a certain amount of money. Furthermore, credit cards are generally used very carelessly; people spend lavishly and end up exceeding the grace period. When that happens, you have no choice but to pay for high-interest rates. Credit cards also result in unneeded expenses when the person doesn’t have cash in hand. So, rather than using it for an emergency need, many people misuse their credit cards.

What are Payday Loans Like?

Payday loans are short-term loans as well, known by this name because of the nature of the loan. When you acquire a payday loan, you can use it for whatever financial need that you took the loan for. You’re supposed to repay the loan when you get your paycheck the following month, which is why you call it a payday loan.

When you apply for payday loans, you’re supposed to fill a form and provide certain documents. Documentation for payday loans is minimal as well. The whole procedure is quite simple, and it takes very less time to have the money transferred to your account. The lender generally checks your documents, which must include proof of employment and proof of income. You can do so by submitting your pay stub as well as your bank statement for a couple of months. After going through the documents, the lender decides on the amount of money that you’re eligible to receive and the interest rate.

Why Are They Better Than Personal And Credit Card Loans?

One thing that makes payday loans super convenient is the fact that the lender doesn’t check the credit scores of the borrower to lend money. This is one rare kind of instant cash loan that doesn’t involve credit scores being checked. You don’t need to have a good credit score or collateral to provide the lender. So, for people who have a bad credit history, personal loans, and credit card loans are not viable options. And when that’s the case, you can always look for a payday loan.

The Downside

Payday loans have one big downside, and that is- you only get a small amount of money from a payday loan. When compared to the amount of money you can get through personal loans and credit card loans, payday loans look very small. So, if there’s a situation where you need a lot more money than what a payday loan has to offer, you’re left with no choice other than going for a credit card loan by depositing money, given you have bad credit scores. However, if credit scores aren’t your problem, you can always look for personal loans.

Why Are The Interest Rates High?

People often complain that personal loans, payday loans, and credit card loans have a high-interest rate. One thing to understand from the lender’s point of view is that providing a small amount of money, that too without asking for collateral, is not quite a profitable deal for the lender. This is why lenders charge a high-interest rate to make sure if the borrower fails to repay the loan amount, the lender gets to make some profit out of it.

This especially applies to payday loans. Payday loans have a reputation of having unreasonably high-interest rates. However, payday loans are the only practical option you have in case of an emergency when you don’t have a good credit score as well. This also implies that the money that you borrow through instant cash loans and payday loans are supposed to be used wisely. Don’t make it a splurge, and if any amount is saved, keep it for repaying the loan amount so that you don’t have to spend a major chunk of your salary. When you understand this and know that loans are not a luxury; they’re for emergencies, you’d know the high-interest rates are justified.

Looking for a Reputed Lender

When shopping for a loan, it’s always recommended to be patient and look around, never making a hasty decision. Today, more and more people seek loans and have credit cards. And the market is full of lenders. You would never be out of a good deal, only when you spend enough time to find the best deal. When you come across a lender, make sure you run a background check. It’s always important to pick a handful of lenders, shortlist the best ones, and compare the interest rates. That way, you won’t end up paying unreasonably high-interest rates.

Online payday loans and other kinds of loans are increasing in popularity. They are a lot more convenient since you don’t have to drive around. All you need is an internet connection and your smartphone or laptop to fill the application form, provide documents, and sign the agreement. This is why it would be a better decision to look for an online lender instead of acquiring a short-term loan that doesn’t need collateral from a bank.

One thing to keep in mind is never falling for interest rates that are too low. There are many lenders who may trick you into a scam. Also, make sure that you go through the terms and conditions before you sign the agreement for a loan. This is because there may be hidden terms and conditions that you might miss. Later on, these terms and conditions may leave you vulnerable, giving shady lenders an opportunity to make a lot more money out of you. Given you choose the right lender who has a reputation in the industry, getting a loan shouldn’t be a problem.

What to keep in Mind?

Whether you’re seeking a personal loan, payday loan, or a credit card loan, one thing to always remember and assess before applying for the loan is if you would be able to repay the loan in the given tenure. Getting a loan is never a bad idea. The whole concept of loans is based on the fact that we can’t expect when we’d be in a financial crisis. And when that happens, we should have a support system to deal with the crisis without having to succumb to it.

So, loans make sense. However, getting a loan should never mean you’re getting stuck in a loop of debt. Loans can also cause a catastrophe when not dealt with caution. Make sure you commit yourself to pay back the loan amount so that you don’t have to pay higher interest rates or end up affecting your credit scores. While personal loans, payday loans, and credit card loans can fetch a small amount of money, for bigger loans, you need a good credit score, and you should make sure you don’t do anything to damage your credit scores.