Among different types of loans that are available for borrowers, there are certain types of loans that can be confused with another loan type. Two common loan types under this category are cash advances and payday loans. Though they are pretty much different in their respective forms, people get it confused because they are short terms loan and the payment process can be quite similar at times. So here we are trying to explain payday loans and cash advances separately so that you will get a better understanding of the terms and use them appropriately in the future.
- Payday loans are short-term unsecured loans available with the financial institutions. These loans are often procured to meet out the short-term financial requirements, sometimes very short-term, in fact. This is because of the way payday loans work.
- When a borrower obtains a payday loan, he is expected to make his repayment the day when he gets his immediate next salary. So the borrower produces a post-dated cheque which the banker or the financial institution can encash after the borrower’s account is credited with his salary.
- Payday loans are usually said to have a positive impact on the borrower’s credit score as long as he makes his repayment promptly.
- In the event that the borrower doesn’t pay his loans, the debt is sold to a debt collecting agency and the borrower is expected to make his payments there. This is how payday loans function.
- The major reason for using the terms cash advance and payday loan interchangeably is because there are two types of cash advances of which the first and the infamous type works exactly like payday loans. You advance a particular amount of cash and you are expected to repay it in a month or when you receive your salary. Here the credit score of the borrower is not taken into concern.
- But this is not how the conventional type of cash advances work. It is exactly like the way your credit purchases work. The borrower is expected to hold a line of credit or a valid credit card that makes you eligible for the quantum of cash advance that you require.
- Unlike payday loans, there is some waiting period in cash advances as the approval process is quite tough on the borrower. So the borrower will have to wait for the approval before getting access to his loan. The credit score of the borrower is also scrutinized during the approval process.
- While payday loans are usually used for personal requirements, cash advances are obtained for professional and business requirements.
These are some of the differences between cash advances and payday loans. So the next time you make use of these terms, make sure that you use them appropriately.