When looking to borrow money for a short period of time, you will normally find there are plenty of options to choose, from a huge array of lenders. Narrowing down your options is important to find the best loan for you, especially if you’re unsure whether to pick a short-term loan or a payday loan.
Understanding the difference between these types of loans will make it much easier for you to choose the right loan offer for you, and ensure you can comfortably afford to make repayments too. To give you a helping hand, we’ve put together a short guide on the difference between a short-term loan and a payday loan.
What are payday loans?
A payday loan is a financial product allowing you to borrow money to tide you over until payday. They are extremely short loans taken out to cover emergency expenses such as your car breaking down, or even your boiler packing in at home.
As much as they are useful for those who need money quickly, they are often expensive to repay and come with a very high interest rate. That means that payday loans aren’t always the best option for those wanting to borrow money, and can lead to further financial difficulty if you aren’t able to pay back the funds in time. We have listed the associated risks of payday loans below:
- Usually taken out in an emergency – you might not end up with the most suitable loan
- A payday loan normally needs to be paid back in full after 30 days
- Any further financial issues can jeopardise your repayments
- High interest rates will mean failure to repay will be expensive
How are short-term loans different?
Short-term are slightly different in that they are taken over a longer period, lasting between 2-12 months. They also have high interest rates and will subsequently be quite expensive to repay, depending on the amount of time you choose to take the loan out for.
You’re more likely to get a lower interest rate, but this is just because it is over a longer period, meaning the APR won’t seem as severe. Since both loan types are meant for those with a bad credit score, you still won’t be able to gain access to the best interest rates available with standard personal loans.
Is the application process different?
Applying for a short-term loan shouldn’t be any different from a payday loan, considering that they’re both loan products that require the same details. You should stick to the same application process for both:
- Check your credit report
- Check your eligibility using moneymatcher
- Confirm how much you would like to borrow and over what time period
- Start browsing loans to compare interest rates
- Read the terms of the loan offer thoroughly to make sure you understand the repayment schedule and can comfortably afford it
- Apply for your chosen loan
As much as you might need money quickly to sort out an emergency situation, you should always try and take your time in choosing a loan. This will ensure you can easily pay off your loan in full within the time given.
Are payday loans more expensive?
Not necessarily. In fact, since they are shorter, they might actually be a little bit cheaper overall as you have less time to accumulate interest. It all depends on the APR listed and the representative example provided, as this will indicate how much you will have to pay on top of your borrowed amount.
Overall, you will find both loans will have similar interest rates so will be similarly priced. The difference will be the amount of time you choose to borrow money for. For example, borrowing £300 over 3 months will always be more expensive than borrowing over 90 days.
Are there differences in the repayments?
Your repayments will change depending on the amount you choose to borrow and the length of time you’re borrowing for. Short-term loans usually have a longer repayment schedule compared to payday loans.
You will sometimes have a lower first repayment as part of your payday or short-term loan, with the remaining amount spread over the rest of the term. In the case of a short-term loan, repayments should be every month, whilst payday loans will be on a certain day, but usually just after you’ve been paid your regular income.
Depending on your loan agreement, you might even have the flexibility to pay any time with a payday loan, as long as the total amount is paid off before the end of the term.
How do I know what is right for me?
In general, you can work out which loan product is right for you based on how much you want to borrow and how long for.
- Payday loan - if you only need a small amount and can definitely pay off that amount on or after your next payday, this could be a viable option
- Short-term loan - on the other hand, if you think it will take you a bit longer to repay, such as a few months at the very least, you should choose a short-term loan instead
Overall, a short-term loan is a much safer option compared to a payday loan, since it gives you the opportunity to borrow for longer, without having to pay back what you owe immediately. There is less risk attached and you can borrow slightly more to assist with additional expenses during the month.
Always start off by checking your credit report and your eligibility through moneymatcher, as this will give you a better indication of which loan product is right for you. Alternatively, start browsing loans using the link below.