How Do Lines of Credit Differ from Payday Loans?
Sometimes, life happens. We know it, and we cannot avoid it. Almost everyone in the world has come to a point where they needed that extra financial help to push through the hard times. Whether you face a medical emergency or need to repair a leaking roof urgently, the little surprises that life may throw your way can always drain your bank account.
Fortunately, money lenders will always be there to help you cover unexpected expenses. While there are many loan options to choose from, the two most popular picks for quick cash are personal lines of credit and payday loans. But how do these two differ?
In this post, we look at some of the critical differences between lines of credit and payday loans.
What Is a Line of Credit?
A line of credit is simply a revolving account that allows you to draw and spend money up to a specific limit. Once you repay the borrowed amount, you can borrow again. Lines of credit work pretty the same way as credit cards.
In fact, the most common type of line of credit is a credit card, although other types such as business lines of credit and home equity lines of credit do exist.
The repayment structure of a line of credit is not as structured as that of a payday loan. Therefore, it is always good to pay back any amount borrowed from a line of credit as quickly as possible to avoid the high-interest rate.
In this case, each lender’s terms are different. Be sure to read and understand the fine print of your lender’s terms to know what you can and cannot do with your line of credit.
What Is a Payday Loan?
Payday loans are short-term loans for individuals who need some quick cash for an emergency expense or to push them through to their next paycheck. This type of credit gives you a specified amount of money that is usually paid off in full plus interest accrued on your next payday.
Financial experts advise using payday loans only to settle emergencies to avoid overdrawing your bank account when you are paid. Interest rates vary from one lender to another, and you only pay interest on the amount you borrowed as opposed to the full sum of your limit.
What Is the Difference between the Two?
The most significant difference between a payday loan and a line of credit is how you receive the borrowed funds (lump sum vs. revolving) and how you repay the loan (structured vs. as-you-go).
There is also a difference in the interest rates. While both of them attract relatively high rates, you may find payday loans to be a little bit more expensive compared to lines of credit.
The interest rate on a line of credit may be variable or fixed depending on your income and credit score. A payday loan is more likely to have a fixed interest rate since it is short-term. However, your credit score may not play a critical role in securing a payday loan.
In most cases, the lender will be interested in your monthly income and ability to repay the loan on time other than credit history.