Payday loans vs. Line of credit- what’s the difference

Having access to multiple finance options eases the lifestyle. It helps you choose the most affordable one according to the purpose. For example, a payday loan is ideal for meeting any small and immediate need before the next salary day. Alternatively, a revolving line of credit provides constant access to money, requiring only a minimum payment every month. It is appropriate for big purchases, funding a huge bill, etc.

Most individuals get confused between payday loans and a line of credit. Which one to use for your daily needs? What is the basic difference between the two? If you have any concerns like these, the blog may help. It discusses Payday loans Vs. Line of Credit differentiation in detail. You can choose the one that fits your needs well.

Payday loans Vs. Line of Credit: Meaning

Payday loans are a short-term, unsecured loan facility that helps one counter emergencies effectively. One may get up to £1500 with a repayment term of 30 days. As the name suggests, you pay the loan in a lump sum by the next pay cycle. However, most loan providers now offer flexibility to simplify payments by repaying the amount in manageable instalments. The interest rates on payday loans stay competitive due to no collateral, no guarantor, and ease of application.

Thus, borrowing only the required amount is the wise thing to do here. Anyone with consistent income may qualify for the loan. Individuals with bad credit may also get a payday loan because these are mainly affordability-based. You may qualify if you can afford the payments.

A line of Credit is a type of revolving credit facility. In this, the credit provider determines the credit limit by analysing your credit score, income, monthly expenses, savings, etc. It is the limit up to which you can withdraw funds for your needs. The option is usually ideal for purchases requiring a huge lump sum. The interest rates on a line of credit are higher than those of payday loans.

Payday loans Vs. Line of Credit: Approval chances

If you need money urgently, then a payday loan would be the most suitable option. The approval chances are high with minimal loan processing. You get funds within 30 minutes, unlike a line of credit.

No collateral, no guarantor, or co-signer mandatory requirements ease the deal to get a loan. Moreover, no barriers to a bad credit history exist when you apply for a payday loan.

Instead, you may get no refusal payday loans in the UK if you can afford the loan payments without affecting your budget. Identify and compare the quotes and fetch the one that meets your affordability standard. Moreover, providing valid and verifiable income may help.

A line of Credit may be a convenient way to get money. It means you qualify for a certain limit within which you can use the cash. The credit providers decide the limit. Getting a revolving credit is challenging in comparison to Payday loans. It is because the creditors undertake multiple aspects before approving the request. They analyse income, credit score, credit utilisation ratio, heavy debt, employment history, etc. It helps them decide the amount limit that you can fairly manage to pay for. Around 80% creditors demand that a user has a good credit score and stable income to qualify. Moreover, the specific requirements may vary according to the credit provider.

Payday loans Vs. Line of Credit: How does repayment work?

As mentioned above, payday loans are short-term loans that require you to repay the dues over the next payday. The interest rates and repayments stay fixed for the loan duration. However, one gets the flexibility to either pay the dues in one lump sum within the repayment term decided. Or, one can split the lump sum into equal and manageable monthly instalments.

The interest rates stay high on such short-term loans. Therefore, one must try to repay the dues timely manner. Paying the loan in instalments over a lengthy term means paying more interest. Decide the repayment type and the term according to your financial habits and expenses.

Alternatively, Payments on lines of credit work much like credit cards rather than payday loans. It allows one to borrow up to a limit whenever one wants to. In this, one doesn’t need to apply each time to withdraw funds, unlike payday loans. You just need to pay the minimum amount every month if you cannot pay the full amount. However, this may take you longer than a payday loan to clear the dues. Credit providers may also charge penalties or interest if you skip the payments.

Payday loans Vs. Line of Credit: Pros and Cons

Every financial facility has its positives and negatives. Knowing this will help you choose the right amount, decide the right financial option, and meet your needs in a money-friendly way.

Pros and cons of payday loans:

Pros of payday loans	Cons of payday loans
Individuals with a bad credit score may also get a payday loan	The interest rates on payday loans remain higher than credit lines. It may increase the total amount payable.
You get the funds quickly in your bank account.	Generally, these loans have short repayment periods, which may make it challenging for seasonal pay getters.
It helps one prevent long-term debt and payments. Instead, helps you get debt-free and achieve other life goals.	The risk of getting stuck in the debt cycle remains high. One could fall into one if he fails to repay the dues and keeps rescheduling or rolling up to the next date.

Pros and cons of lines of credit

Pros of lines of credit	Cons of lines of credit
A line of credit allows you to borrow and repay the borrowed amount timely manner. One can withdraw funds up to what one can fairly afford to repay.	The interest rates may fluctuate as they can be fixed or variable according to the economy. It may affect the total amount and interest you get and pay later.
Lines of credit have cheaper interest rates in comparison to payday loans. It is because you repay the dues multiple times as you re-withdraw.	Skipping a payment may affect your credit score negatively.
Using it responsibly may help you build a credit score.	With a huge lump sum available, there lies high potential for over-borrowing. It may increase the debt and affect the finances.

Bottom line

Therefore, payday loans and lines of credit differ in form and functioning. A payday loan is ideal to meet any short-term needs for up to £1500. Alternatively, you can consider a credit line if you usually have high lump-sum needs. For example, businesses may benefit from this as running operations successfully requires consistent cash access. If you have bad credit, a payday loan would be an ideal option.