Payday loans and personal loan overdrafts are the solutions to our sudden cash needs. Easy to avail, these loans cater to our small to medium fund requirements. To understand which of these two loan options is better, we need to first understand them both.
Personal Loan Overdraft
As per your personal loan availability, you can withdraw funds as you need and pay interest only for the amount you withdraw and not the amount sanctioned. The availed overdraft amount can be part-paid without any extra charge. You can go for multiple withdrawals and paybacks within your personal loan eligibility amount. Personal loan interest rates are kept competitive and the loan amount can be substantial. The loan tenure can extend from one to five years.
Payday loans are generally small amounts of loans availed for a short duration and at a comparatively higher rate of interest. The loan is decided by the lender based on the salary of the person, and the repayment has to be done once the next paycheck arrives.
Let us now look at why personal loan overdrafts are better than payday loans.
High rate of interest: The payday loans interest rates can be quite steep. Due to the short tenure, the amount paid in interest may not seem very high. Personal loan interest rates, conversely, are comparatively low. With a personal loan EMI calculator, you can find out how much amount is paid against the interest portion.
Faster repayment: Payday loans are extremely short-term, often requiring repayment in a month or two. Apart from the high-interest rates, a penalty for delay in repayment may also be charged. The personal loan repayment terms are more convenient, and the borrower gets a longer duration.
Processing fee: Payday loans also charge a processing fee, which further raises the cost of credit. Thus, you end up paying not only the high rate of interest but also a processing fee. In the case of personal loan overdraft, the interest rate is low. Moreover, the processing fee is also a small percentage of the loan amount, often being approximately 3%.
Amount limit: Payday loans are given for smaller amounts. It is good enough to meet your monthly bills or a sudden expense. However, if you need funds to meet a hospital bill, plan your vacation, buy home appliances, or even a two-wheeler, a personal loan overdraft would be the better option. If your payday loan is approximately 50% of your salary, a personal loan overdraft can be sanctioned for even as high an amount as Rs. 25 lakhs. If you have an ongoing need for cash or a higher fund requirement, a payday loan may not be a suitable option for you.
Despite the high credit cost and the aggressive repayment timeline, payday loans are availed by borrowers as it is one of the fastest ways of availing cash. The eligibility norms are liberal than personal loans, and it is, therefore, easier to avail of a payday loan. However, borrowers can also avail of personal loan overdraft faster by keeping their personal loan eligibility pre-approved. Besides, most lenders accept online personal loan applications and complete the documentation formalities online as well. This ensures that personal loan overdraft is almost as fast as payday loans when it comes to the speed of processing.
As regards both cost of borrowing and repayment, personal loan overdraft is a better option than payday loans. While you may be tempted to borrow some quick cash on the go through a payday loan, personal loan overdrafts offer a more wholesome solution to your borrowing needs.