If you find yourself unable to cover your current costs then you may be considering taking out a short or a long term loan. But, you might quickly realise from one quick search online that there are hundreds of direct US lenders offering so many types.
One of the most popular short term loans is a Payday Loan. These are relatively short-term loans, typically with a term of around a month, which may extend very high-interest credit based on your income. These loans are handy when to those in need of some quick emergency cash.
On the other hand, a long term loan is generally considered to be a loan with a repayment term of at least over a year, yet such a loan may be paid back over a period that spans over a decade. These loans will offer funds for more substantial purchases, such as that of a car or house.
So, which one is best for you? Keep reading to find out whether a payday or long term loan is right for you.
What Are the Differences Between Payday Loans and Long Term Loans?
There are a few key differences between payday and long term loans. For instance:
The primary difference between a payday loan and a long term loan is, most obviously, their repayment term. Whilst a payday loan will generally be required to be paid back a month after they are borrowed, a long term loan can be repaid over a number of years.
Payday loans extend credit on an incredibly high-interest basis. The interest charge on such a loan typically has an Annual Percentage Rate (APR) of around 1,250%.
Whilst the interest rates on long term loans will vary considerably, their APR is nowhere near this amount as this could not be sustainable over a number of years.
Of course, you will likely pay much more interest in the repayment of a long term loan due to the number of years the term will last, but the interest in terms of its APR will not be so high, and this will not feel so noticeable.
Fixed Vs Variable Interest
Whilst payday loans have a fixed interest rate, meaning the interest that will be paid is a set amount, long term loans may have fixed or variable interest rate, A variable rate loan moves with the market rates. As long term loans may span years, the lender may opt to extend credit with a variable interest rate.
What Can I Use Them For?
These loans are notably different and cannot be used interchangeably – when it comes to deciding on which loan to take out it is not a case of which loan is objectively better, but which best suits your situation.
If you are looking to take out some cash as you need to cover emergency costs, a payday loan may suit your needs. Payday loans are handy if an unexpected cost rolls around which you have not had time to financially prepare for. For example, if you need to pay for the repair of a vehicle or household appliance, such as a boiler breaking.
A long term loan, on the other hand, can help you to cover your costs for a number of years – something which can also enable your repayments to be more widespread and manageable. Long term loans are useful if you plan to invest in a more substantial purchase, such as a car, a phone or a house.
Payday Versus Long Term Loan: Which Is Best for Me?
So, which loan is best for you?
Here are a few questions to consider:
- What do you need the loan for?
- How much would you like to borrow?
- How much can you afford to borrow and how long for?
A payday loan might be more appropriate if you need to cover costs fast that you can’t currently afford. These are also great for financial emergencies and short term expenses. But, you should consider this decision due to the potential high interest charges. Additionally, you will need to be able to repay the loan quicker.
You will also need to be eligible for a payday loan – as not all US states offer them. Some alternatives to payday loans are borrowing from a family or friend, using any savings you have built up, negotiating a payment plan for a bill instead or, if you’ve built up enough equity in your home, you may be eligible for a home equity loan.
If you have bad credit, a payday loan may be a particularly prudent option as they often do not require credit checks to the traditional degree a bank demands. A check may be carried out, but usually only the minimum credit rate will be required.
Whilst a payday loan may have alternatives you can opt for, a long term loan may be a better option. Examples of long term loans include car loans, mortgages and certain personal loans. These are more suitable for borrowing larger amounts of money.
So, it is clear that each of these loans are valuable in their own right and specific circumstances – as long as you are always careful with the lender you select, take safe financial advice wherever you are unsure, and always have a watertight repayment plan.