If you need a loan to help cover monthly expenses, it’s important to know what options are available to you and just how much you’ll be paying back in fees and interest. Due to the nature of short-term loans, and depending on the risk that the lender is willing to take lending you money, you could end up paying as much in fees as the amount that you borrow. Let’s take a look at two popular loan types that can help you get through those times when your paycheck just might not cover your monthly expenses: payday loans and personal loans.
Payday loans are readily available and relatively easy to get, but whether or not they can actually help you depends on a variety of factors. Generally, payday loans require no credit check, and they are fee-based, so they are a sufficient option for those that might not have the credit history to secure a lower-interest loan. These loans are short-term (two weeks to a month), and payment is made when your next paycheck is issued. Payday loans are only secured by your next paycheck, so the only form of collateral that the borrower holds is your promise of repayment in the form of a postdated check or automatic debit. If you are looking for a loan to cover larger expenses, payday loans might not be for you; these types of loans are generally around $500.
Due to their short-term nature, fees can be relatively high with payday loans compared to other types of funding. For example, if it’s the 1st of the month and you just got paid $1,000, yet your expenses for the month came up to $1,300, you can take out a payday loan for $300 against your next paycheck to get yourself up to date. With administrative fees and interest, your $300 loan can easily have an actual cost of $400. As you can see, if you were short on money in the first place, you can easily be placed in a position where you’re short again the following month and are forced to take out another loan to cover the expenses of the first. This snowball effect can cause you to pay significantly more in fees than the original amount of the loan.
While a payday loan might sound like a type of personal loan, the two are actually significantly different. A personal loan is usually paid back over a longer period of time (6 months to several years) than a payday loan, so the amount of the loan is usually greater. Repayment of a personal loan can be structured in many different ways depending on your debt level and income, and can be paid off early with little to no penalties.
Unlike payday loans, personal loans may or may not require collateral depending on your credit score. Personal loans are also interest-based (although they do usually carry a generation fee), and your credit score will affect your interest rate, as well. If you haven’t checked your credit score in a while, you are allowed one free credit report per year from the “Big 3” credit agencies. (Click here for more information from the FTC regarding your free credit report.) This can have an effect on how much you owe over the life of the loan; the better your credit score the lower the interest rate you may be granted, which means less money owed over the life of the loan.
Also, repayment options on personal loans are a little bit more flexible. Where there is usually a monthly payment involved, you may also pay a little more each month or even pay it off early without penalty. The reward for doing this is lowering your interest payments over the life of the loan. Not all lenders offer early payoff options, so make sure that you ask before you take on any loan. Never assume.
Note: All LoanMe personal loans offer flexible repayment options with no early payoff penalty.
Which is right for you?
If you’re in a pinch and need cash quickly, these two types of loans are both viable candidates to get you the money you need. If your financial status is fragile...that is, if you’re strapped for cash and haven’t stockpiled a sufficient amount of savings, a personal loan like those offered by LoanMe might save you in the long run over payday loans. With flexible repayment options and terms that can be suited to your budget, a personal loan can be a great way to get out of the hole and back on your feet. Contact one of the personal loan experts at LoanMe if you’d like to learn more about the programs we offer.