If you’ve been hit with unexpected and urgent expenses – car repairs, home repairs, medical bills, urgent travel – and are in need of a quick cash loan, you’ve likely taken to Google to be presented with more than a few options. You may see the terms “payday loans” and “small loans” and “personal loans” used interchangeably. However, payday loans (or any small cash loan) and personal loans are two different types of credit products. They are regulated differently, have different lending criteria, and have varying impacts on your finances. The nature of the two types of loans also determine how long you’ll have to wait to get your funds. So what are the differences between payday loans and personal loans?
Difference #1: Amount you can borrow
The first aspect of payday loans or small cash loans where they fit in the financial marketplace. Government regulators consider payday loans “small amount credit contracts” or SACCs a loan of $2,000 or less, while larger payday loans, from $2,001 to $5,000, with longer terms and different fee structures are considered “medium amount credit contracts” or MACCs. SACCs and MACCs have set borrowing limits – if you need more than $5,000, you will need to take out a personal loan.
Difference #2: Purpose and reasons
Generally, but not always, a personal loan is for a pre-planned expense such as a holiday, car purchase, or home renovation, while a payday loan or instant cash loan is for an unplanned and urgent expense such as the emergency loan situations we described above. Though you can apply for payday loans for pre-planned expenses, the higher interest rates and shorter lending terms usually mean they are not as cost effective.
Difference #3: Terms, interest rates, and fees
SACCs and MACCs have strict terms, interest rates, and fee structures that are regulated by various government financial bodies. For example, a lender can only set the loan terms for a SACC between 16 days and one year. A lender can only charge a 4% monthly fee, a 20% establishment fee, pass on government fees and only charge enforcement fees or default fees if a borrower fails to pay back the loan.
Personal loan terms and interest rates can vary depending on the amount borrowed and the preferences of the borrower (which is also dependent on their credit score and financial situation.) Terms can range from one to seven years or even longer – though longer terms means paying more in interest. Also, interest rates can be calculated differently. Some personal loans may advertise a 7.5%p.a. interest rate, which doesn’t include fees and charges, while other loans may show a 11%p.a. comparison rate, which bundles all the mandatory fees into one number. (The 11% comparison rate may end up being cheaper than the 7.5% rate! Make sure you do your calculations.)
Difference #4: Secured vs. unsecured
Small loans are types of unsecured loans – that means you don’t need to put up an asset or possession as collateral. In a personal loan, you can choose a secured loan (such as a car loan) or an unsecured loan. Unsecured personal loans charge higher interest rates due to the added risk of no collateral to repossess if the borrower doesn’t pay back their loan (defaults).
Difference #5: Regulation and application times
As mentioned before, all loans are regulated by the government. Consumer loans are regulated by the National Consumer Credit Protection Act – that includes small and medium credit contracts as well as consumer personal loans (as separate from business loans.)
Lenders like Fundo can use the latest in technology to determine eligibility for small loans, which means processing times can be as short as three to five minutes, with funds being deposited within 60 seconds (if your bank account has PayID.) Personal loans may need additional documentation and credit checks in order to approve a loan, especially if it’s a large loan ($50,000 or more) that is unsecured. This may take a few business days or even a week; but that shouldn’t matter if an expense is pre-planned. People who are in need of quick cash loans can’t wait for a bank to process these loans as they need cash now.
Remember: the advice presented here is general in nature. Seek professional financial advice from a licensed financial adviser before applying for credit or finance products.
