Payday Loan vs. Personal Loan – Is there a difference?

Man and woman comparing personal loan and payday loans in Singapore.
checking blog post using mobile

Payday Loan vs. Personal Loan – Is there a difference?

checking blog post using mobile
Man and woman comparing personal loan and payday loans in Singapore.



Whether you’ve got an unexpected bill to pay or you’re short on this semester’s tuition payment, you need to find a source of cash quickly. In your search for a quick loan, you’re going to find both payday loans and personal loans. But what types of loans are these and is there a real difference? In this article, you’ll get a quick rundown of each one to help you determine which option makes the most sense for you.

Payday Loan

A payday loan is a relatively small, short-term loan offered by a legal moneylender. It carries a high interest rate and needs to be paid back in a matter of days or weeks, usually whenever your next paycheck is due. The amount you can borrow has to be less than the amount of your next paycheck which means you can usually only borrow a few hundred dollars.

It’s sort of like getting an advance on your next paycheck and the advantage of that is that you don’t have to go through a credit check. You just need to bring some payslips with you to provide proof of income and show when you can expect your next paycheck.

This is the main benefit of a payday loan. It’s very easy to get. You don’t have to go through an approval process like you will with a personal loan. And you’ll get the money more or less instantly. So if your emergency is so urgent that you need money that same day, you may have to go with a payday loan.

With that said, this type of loan comes with some serious drawbacks. Interest rates are extremely high, currently averaging about 48% in Singapore. And you have to pay off the loan with your next paycheck or else suffer a snowball of rapidly compounding interest.

If you are living paycheck to paycheck, you probably can’t afford to hand over a large chunk of (or even the entire) paycheck to pay off a loan. You’ll end up needing to take out another payday loan in advance of your next paycheck. Some people will get trapped in a cycle of high interest payday loans as a result.

Another disadvantage is that the amount you can borrow is relatively small. It has to be less than the value of a single paycheck. So if the amount you need to borrow is more than a few hundred dollars, a payday loan isn’t going to meet your needs.

In the end, this is an option best left avoided. You should really only take out a payday loan if you aren’t able to get approved for a personal loan.

Personal Loan

A personal loan is a longer term, larger loan offered by a bank. The amount you are allowed to borrow is much higher compared to a payday loan. If necessary, you can potentially borrow thousands of dollars. And the repayment term is usually a year or longer so you’ve got much smaller, more manageable monthly payments.

Those are two of the key advantages of a personal loan. You can borrow more and you can make lower monthly payments. So you don’t have to hand over most of your paycheck and risk the need for an additional loan to get you through to the next paycheck.

This type of loan is even more attractive for its lower interest rates. Where a payday loan will usually charge upwards of 48%, a personal loan from a bank in Singapore carries an interest rate of just 8% or 9%. So not only can you pay the loan back over the course of a year or more, you end up paying much less in interest.

With all these advantages, it seems like the obvious choice. Why would anyone even consider a payday loan? The short answer: personal loans are harder to get. While all you need is your proof of income to get a payday loan, a bank will run a credit check.

They also usually require that you earn a minimum annual income of S $30,000; though, there are some who only require S $20,000. So if you have bad credit or earn less than the minimum, you may not be able to qualify for a personal loan from a bank. An alternative could be a loan from a licensed moneylender.

Regardless of your income or credit score, it’s a good idea to at least look into getting a personal loan before you bite the bullet and take out a payday loan. The lower interest and better repayment terms make a personal loan the more desirable choice. A payday loan should really only be used as a last resort when you’ve exhausted all other options.


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