If you have ever considered personal or payday loans and wondered how they might differ or whether one is better for you, we have the answers. Canadians taking out a loan to cover expenses should think about repayment terms and not just getting approved, so they are making smart choices about their finances. Sometimes life happens, and you have a repair or unexpected expenses to deal with.
Personal loans allow for multiple scheduled payments over several months or years, depending on the terms that were agreed to, and amounts from $2,000 to $50,000. Most personal loan rates often depends on your credit score for determining the interest rate you might be charged. This can be anywhere from 10 to 46% on average, give or take a few percentage points. Naturally, the better your credit score the lower the interest rate you would be offered. In addition to the interest rate lenders will often look at your debt to income ratio as well for evaluating your creditworthiness and how likely you might be able to afford and repay your loan if approved. Personal loans are available as secured, requiring collateral, and also as unsecured, where collateral is not required. If you are looking for a personal loan for debt consolidation, home improvement, emergency expenses, moving, wedding, travel, large purchases like an appliance, medical bills, funeral expenses, repairs or similar, then an unsecured personal loan is your best option.
A payday loan is a short term option that is an expensive way to borrow, but in some situations like when you have few choices due to bad credit it is one option. It allows you to borrow up to $1,500 but repayment is due in full by your next paycheque. Requirements to qualify for this option are less than personal loans, but it is a higher interest loan. Most lenders require a regular income, checking account, and a permanent address. Once you’ve completed and submitted the online application, processing is usually fairly quick if you’ve followed the instructions and if approved you should have the money deposited in your account by the next business day. Some even offer faster disbursement of the funds using e transfers and can possibly provide them to you within a few hours. A payday loan is often a last resort due to the higher cost of borrowing and should only be used if there are no other options available. In either cases there can be additional costs such as origination fees and similar, or penalties, making it very important to carefully read your loan agreement.
Your odds of eligibility and being approved with a personal loan have a lot to do with having a good credit score. When dealing with banks the criteria for eligibility is even more strict. Payday lenders are much more flexible and will consider borrowers with bad credit as well, and can often get the funds within hours or by the next day. With personal loans it often takes days to weeks, with banks often taking 1 to 4 weeks. Another option is called an installment loan, which also allows multiple payments and can be an option when you only have a fair credit score.
The first consideration for being able to qualify for a personal loan is whether you would have a good credit score or not. Many banks require a credit score of 740 or higher for a personal loan, with online lenders looking at some applicants with a credit score as low as 600 at times. But your credit profile aside, the one other reason you might consider a payday loan is if you needed the funds quickly for an emergency, unexpected expense or similar reason.
RELATED: Personal Loans vs Line of Credit
If exploring your options and wondering what else you might do when you need money now and can use fast cash, there are some possibilities to consider other than borrowing friends or family available to you.
Employer payday advance – depending on your employer, sometimes a payday advance can be an option to help make ends meet.
Credit card cash advance – while the interest rate is similar to a payday advance, if you have a card this is another option to consider.
Bank or credit union personal loan – with fair to good credit you might qualify at a bank, although it is more challenging to be approved lately with higher credit requirements.
Line of Credit – another option that some choose, you can also find options through a bank and also online lenders as well.
Looking at the costs of payday loans and their ARP shows how expensive they can be.
per $100 loan
|Annualized Percentage Rate [APR] for payday loans
(based on a 2 wk loan)
|Newfoundland and Labrador||$21||548%|
|Prince Edward Island||$15||391%|
Payday loan annual percentage rates (APR) are calculated by dividing the overall amount of what the interest paid to the amount borrowed, and multiplying the amount by 365, and then dividing this by how long the repayment term is in days, then multiplying by 100.
An example would be a two week loan that charges $15 per $100, the APR would be 391%.
The formula for determining this would look like; (((15 / 100) x 365)) / 14) x 100
As mentioned, this can be an expensive way to borrow, and should you be experiencing financial hardship, you might consider talking to Credit Counselling Canada for free financial counselling for help. (Monday-Friday 8:00am to 5:00pm at 1-866-398-5999)
The difference between banks and online lenders might not be clear, but once you start comparing the two it will soon become obvious. While banks may offer great rates, they aren’t always easy to get approved for. Where online lenders have less overhead and are able to compete much of the time.
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A reminder that when looking to borrow you should only consider an amount you can afford in terms of monthly payments, and that it is important for you to monitor and improve your credit score for when you need a loan in the future as well.