If you need to borrow money, a variety of options are available. Two of the most common short term borrowing options are payday loans and short-term personal loans, both of which provide immediate access to cash to help you pay bills, purchase items and run your financial life.
One of these borrowing options — payday lending — has been in the news a lot over the last few years, as new regulations make the industry more borrower friendly.
At first glance, payday loans and short-term loans can seem very similar. However, they’re two different types of loan, each with their own specific advantages and disadvantages for you as a borrower.
In this guide, we’ll explain the key differences between short-term loans and payday loans to help you make more informed, effective and financially sensible decisions as a borrower.
Short-Term Personal Loans
Short-term loans are loans that are designed to be paid back over several installments. These installments are usually monthly, meaning you’ll pay back some of the capital amount and some of the interest due each month for six to 12 months until it’s completely paid back.
Most people use short-term loans for purchasing certain items or covering other major expenses.
Short-term loans are usually approved fairly quickly, with borrowers able to access their loan in around 24 hours. Loans of this type have an approval process, meaning borrowers will usually need some amount of credit history.
From a borrower’s perspective, the advantages of short-term loans include lower overall costs than payday loans. However, the credit check process and approval period mean that loans of this type often aren’t instant enough to help borrowers deal with urgent financial needs.
Payday loans are loans that are designed to provide immediate access to cash when you need it. Most payday loans are for relatively small amounts of money, such as £200 to £500, and are aimed at providing cash until you get paid again.
Often, payday loans are referred to as a “cash advance” or “check loan,” as they’re given out to borrowers relatively quickly. Compared to the 24 hours that’s typically required for a short term loan, many payday loans are processed almost instantly.
Unlike short-term loans, payday loans usually aren’t designed to be repaid in installments over a long period of time. With a payday loan, borrowers receive money for a specific period of time — usually up to three months — and repay the loan in relatively a short timeframe.
Payment schedules for customers are designed to tie in with the borrower’s pay frequency, making it easier for the borrower to deduct a specific amount of money from their wages or salary to repay the loan.
Payday loans form a major part of the UK lending industry, with an estimated market value of approximately £2 billion.
Which option is best for you?
Payday loans and short-term loans both offer a range of advantages and disadvantages. If you have a reasonable credit history and need a loan for upcoming but non-urgent expenses, there are advantages to taking out a short-term loan.
However, if you have a limited credit history or need cash for an urgent expense, there are also benefits to considering a payday loan.
As with all loans, it’s important to borrow responsibly. This means understanding your ability to repay the loan and developing a concrete plan to help you make the required loan installments as they come due.