There will come a time throughout your life when you’ll need to borrow money to get where you need to be, whether you’re looking to start a business, buy a home, or simply make ends meet. A payday loans direct lender can help when times are tough, or you’re faced with an emergency expense. But how do these loans differ from traditional bank loans, and which is right for you? Read on to find out more.
What is a payday loan?
A payday loan is a short-term loan that is offered in small amounts between £100-£1000, typically paid back on the borrower’s next payday. These loans are used to help manage emergency expenses that income may not stretch to cover, and should not be used as a long-term solution. Payday loans are offered by online lenders, which makes the application process quick and easy – you don’t even have to leave the house, which is one of the many reasons they are becoming increasingly popular. Payday loans are also accessible to those that have a less than impressive credit score, as lenders base their decisions on affordability rather than how you’ve managed your money in the past.
What is a traditional loan?
A traditional loan is finance you can apply for from banks and other financial institutions. These loans can range in amounts, up to thousands of pounds, making them suitable for a variety of different types of funding, for example, to finance an important life event, build a property, or open a business. Traditional loans typically require you to have a good credit score to be considered, so you can benefit from some of the best interest rates. The application process can take longer than a payday loan, as more information and documentation may be required.
Let’s take a closer look at how payday loans and traditional loans differ below.
Interest rates
As well as paying off your loan amount, you will also incur interest which adds to the total cost. Generally, payday loans come with higher interest rates as they are offered to those with bad credit. Interest rates also tend to be higher with this type of loan as they need to be paid back over a short amount of time, which means defaulting is more likely. Bank loans can offer lower interest options as credit scores are taken into account. If you have a bad credit history, you’re less likely to be approved for a bank loan. If you have a good credit score, you can benefit from a bank loan with reduced interest rates.
Credit check
Payday loan lenders tend to approve applications based on affordability, rather than how you’ve managed your finances in the past, which means they are accessible to those with bad credit. However, traditional bank loans will carry out a credit check and may even require you to have a certain credit score to be approved. If you can prove to a payday loan lender that you can afford to pay your loan back – by showing bank statements or proof of income – you can benefit from cash when you need it most. To be approved for a bank loan, you will need to improve your credit score to benefit.
Application process
Payday loans are typically offered by online lenders, which makes the application process quick and easy. You’ll only need to supply your lender with a few pieces of information to get the ball rolling, and you can do this all from your own home in just a few clicks. You’ll also be able to get help, ask questions, and track the progress of your application when using an online lender. The process for traditional loans may be slightly longer. Banks require more information, which means your application may take longer to process. And whilst some banks offer online applications, you may still need to pop into a local branch.
When it comes to choosing whether a payday loan or traditional loan is right for you, you’ll need to consider the above points. If your credit score is low, a payday loan will be the best option to explore. If you have a good credit score, and you’re looking for a larger loan amount, talking to your bank about a traditional loan will be the best option.