Authored by : Shiv Nanda, Financial Analyst
One of the most stressful things in life is being hit with an unexpected financial expense that is difficult to cover. For example, your spouse is getting laid off and your kid requiring emergency hospitalization. It would be quite stressful if you don’t have money to cover the rent or medical bills.
So, what do you do? Your instinct might be to borrow money from friends or family, but there are other options that you can consider. These include applying for small personal loans or payday loans.
Small Personal Loans
A small personal loan is an unsecured personal loan that can be used to manage an urgent but small financial need. These are usually borrowed over longer periods, which gives you more time to repay the borrowed amount.
The interest on small personal loans is lower as compared to the interest on payday loans. When you apply for small loans, you may get some flexibility to choose a repayment tenure.
Ideally, when you borrow a small personal loan, plan the repayment in advance. This gives you an idea of how much you can afford to pay every month and plan your budget accordingly. Never borrow more than what you can afford.
This is a type of short-term loan that can help you cover immediate financial needs until you get your next paycheck. The payments are typically due within two weeks or your next paycheck – whichever is sooner.
Since the amount and repayment duration for this type of loan is small, the interest rates are really high. However, if you repay the loan before the due date, the interest rate won’t matter much. So, apply for this loan only if you are confident of repaying before the due date. Otherwise, you will rack up a lot of interest.
This type of loan has minimum eligibility criteria, which makes it possible to avail, even with a low credit score. You can apply for a payday loan with some of the leading Non-Banking Financial Companies (NBFCs) and online lenders.
Differences Between Small Personal Loans and Payday Loans
- Interest Rates
Small Loans: They are generally fixed-rate loans. The interest rates are quite reasonable, making it easy to plan your monthly expenses.
Payday Loans: They have extremely high interest rates since the borrowed amount is usually small.
- Credit Score
Small Loans: When you take a small loan, the lenders would typically report your repayment history to the credit bureaus. When you repay these loans on time, your credit score will improve. Further, this will help you qualify for loans in the future.
Payday Loans: These types of loans will have little to no effect on your credit score. Payday lenders do not report to credit bureaus. Therefore, it won’t help you build credit.
- Type of Repayment
Small Loans: You get a certain degree of flexibility in the length of the loan offered. This allows you to create a repayment schedule according to your convenience.
Payday Loans: These have extremely short repayment terms. Typically, the repayment period on a payday loan is two weeks.
Small Loans: The tenure can be for a few months or years.
Payday Loans: The tenure is a week or two, usually until your next paycheck.
- Eligibility Criteria
Small Loans: They have eligibility criteria like minimum income, age, and high credit score, to name a few. You won’t be able to apply for this loan unless you fulfil the eligibility criteria.
Payday Loans: This type of loan has minimum eligibility criteria, which makes it possible for almost anyone to avail of the loan.
If you find yourself in a financial fix, do not stress. Apply for one of these loans, and you will be able to handle a financial emergency.