In the world of lending, short term loans and Payday Loans are two commonly sought-after options for individuals facing urgent financial needs. These types of loans provide quick access to funds to address immediate expenses, but they differ significantly in their terms, repayment structures, and borrowing requirements.

For those navigating the realm of short-term borrowing, understanding the key differences between these two options is crucial to make informed financial decisions and avoid potential pitfalls.

In this blog, we will explore the distinctive features of short term loans and Payday loans, shedding light on their advantages, and drawbacks, and how they can impact borrowers’ financial well-being.

Key takeaways:

• Short term loans and payday loans are popular options for those who need money quickly.
• It’s important to understand the differences between payday loans and short term loans before making a decision.
• A short term loan offers more flexibility and people with poor credit scores can also apply.
• Responsible borrowing is key to avoiding damaging your credit score and maintaining long-term financial stability.

Understanding short term loans

Short term loans are designed to help people who need cash quickly in their bank account. These loans are typically available for small amounts and have a short repayment term starting from a few weeks to a few months depending on repayment amount and on the lender.

Short term loans are also known as quick loans, small loan, same day loans, or emergency loans. The online application process for short term loans is quick and easy, and once approved, you can get the approved loan amount in your bank within a few minutes to a few hours.

Benefits of short term loans

• Quick and easy online application process
• Immediate access to funds, if approved
• Flexible repayment terms
• Ability to repay the loan early without extra fees (may differ from lender to lender)
• Individuals with a poor credit score can also apply for a short term loan

Drawbacks of short term loans

• Short term loans often carry higher interest rates compared to long-term loans
• Limited loan amounts
• The short repayment period can be challenging for borrowers to manage, especially if they are already experiencing financial difficulties

Understanding payday loans

Payday loans are a type of short term loan designed to help individuals cover unexpected expenses or serious money problems until their next payday. These loans typically range from £50 to £1,000, with a repayment period of up to one month.

Unlike traditional bank loans, these loans are accessible to individuals even with poor credit scores and have a much faster loan application process. They are often referred to as instant loans because they provide the funds almost immediately, making them a good option for those who need to withdraw cash quickly.

Benefits of payday loans

A payday loan has several benefits that distinguish them from traditional bank loans:

• Instant access to funds
• Easy application process
• People with bad credit history can also get approved by payday loan lenders
• When you take out a payday loan, it’s meant to be repaid quickly. This eliminates the burden of long-term debt
• Payday loans are unsecured. You don’t need to put up any collateral to get approved for the loan

Drawbacks of payday loans

• Payday loans are notorious for their exorbitant interest rates
• Payday lenders require repayment on the borrower’s next payday, which can be as short as two weeks
• The high borrowing costs and short repayment period can lead to unaffordable loan repayments for many borrowers
• Payday loans may not positively impact a borrower’s credit score. So, if you are looking to improve your credit score via a payday loan then it might not work for you.

It is important to carefully consider all the features of payday loans before making a decision. Borrowers should also ensure they have compared other payday loan companies and lenders and are capable enough to make the repayment on time and pay back everything in full to avoid any additional fees or charges.

Key differences between short term loans and payday loans

Short term loans and payday loans are two types of loans that are often compared due to their similarities in terms of accessibility and quick approval. However, there are key differences between the two that borrowers should consider before making a decision.

Loan duration and repayment terms

Short term loans typically have a repayment period of 3 to 12 months, while payday loans are due within a few weeks to a month, usually on the borrower’s next payday.

Interest

While both short term loans and payday loans tend to have higher interest rates compared to long-term loans, payday loans often come with exceptionally high Annual Percentage Rates (APRs), making them one of the most expensive forms of borrowing.

Credit check

Short-term loans, including instalment loans, may involve a credit check as part of the approval process, and the borrower’s creditworthiness may influence the interest and loan terms. Payday loans, on the other hand, often do not require a credit check and are accessible to borrowers with poor credit.

Exploring other loan options

Short term loans and payday loans are not the only borrowing options available to those in need of cash. It’s important to explore other options and find the one that best suits your needs. Here are some alternatives to consider:

1. Instalment loans

An instalment loan is a loan where the borrower repays the borrowed amount in regular instalments. These loans usually come with fixed repayment terms, requiring the borrower to make consistent monthly payments until the entire loan is paid off.

This predictable repayment structure makes instalment loans an appealing choice for borrowers seeking a stable and manageable monthly payment plan.

2. Bad credit loans

Bad credit loans can be helpful to individuals with a less-than-perfect credit history. These loans offer an alternative option for borrowers who may have low credit scores, a history of missed payments, or past financial difficulties.

While they can be helpful for urgent financial needs, borrowers should be cautious of higher interest and fees associated with these loans. Responsible borrowing and timely repayments can improve credit scores over time and open doors to better financial opportunities.

3. Personal loans

Personal loans are a type of unsecured loan offered by financial institutions, such as banks, credit unions, and online lenders.

These loans provide borrowers with a lump sum of money that can be used for various personal expenses, such as debt consolidation, home improvements, medical bills, travel, or any other legitimate financial need.

4. No guarantor loans

No guarantor loans are a type of loan that doesn’t require a guarantor or co-signer to secure the loan. This means that you can apply for a loan without needing someone else to vouch for you.

These aren’t secured loans, meaning they don’t require any collateral such as a car or home to back up the loan.

5. Credit cards

Credit cards are a popular form of revolving credit that allows cardholders to make purchases on credit and pay them off over time. Credit cards offer convenience, flexibility, and various benefits such as rewards, cashback, and purchase protection.

However, cardholders should be cautious of high-interest terms, potential fees, and the temptation to accumulate debt.

6. Overdrafts

An overdraft is a financial service offered by banks that allows account holders to withdraw more money than they currently have in their bank account, resulting in a negative balance.

It acts as a short-term credit facility, providing flexibility for managing occasional cash flow shortages. Overdrafts can be arranged in advance as an authorized overdraft or can occur accidentally as an unauthorized overdraft, which may incur higher fees.

While overdrafts can be convenient for a short period, borrowers should be aware of the associated fees and interest rates, as continuous use can lead to accumulated debt. Responsible management and timely repayment of overdrafts are essential to avoid excessive costs and maintain a healthy financial balance

Before choosing an alternative loan option, make sure to do your research. Check your credit report and credit score, and compare interest charges, monthly repayments, and other key factors to find the best option for you.

Final words

When considering short term loans vs payday loans, it is important to make an informed financial decision. While both loan types provide quick access to cash, there are significant differences in terms of loan duration, interest and repayment terms.

Short term loans offer greater flexibility and could be a more manageable and affordable option. Whereas payday loans require a lump-sum repayment on the borrower’s next payday.

Borrowers should carefully consider their financial situation and ability to repay before choosing either option and always prioritize responsible borrowing practices to avoid falling into a cycle of debt and maintain their financial well-being.

Disclaimer: The information given above is provided for information purpose only. This is not financial advice.

Related guides:

Payday Loans vs Instalment Loans

Advantages and Disadvantages of Payday Loans

How To Get Out of Payday Loans

How Many Payday Loans Can You Have at Once

Are Short Term Loans Good for Your Credit Rating