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Microloan Vs. Payday Loan: Which One Do You Need?

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When you are evaluating funding options for your small business, the number of choices can be bewildering.

Should you borrow from a bank, a credit union, or an online lender?

Which type of loan should you opt for?

It can be difficult to answer these questions. But most small business owners would agree that if your cash requirements are low, a microloan or a payday loan could be the best option.

Both microloans and payday loans can provide you with immediate cash. Additionally, the lenders who offer these loan products usually follow a simple credit appraisal procedure.

It can be easy to get your loan application approved.

Let’s understand how microloans and payday loans work so that you can decide which one is a better option for your business.

Microloans

A microloan is essentially a business loan for a small amount. Many lenders classify advances that are below $50,000 as microloans.

However, some financial institutions have a higher limit. They consider loans of $75,000 or less as microloans.

At Camino Financial, this is the categorization that we follow:

Camino Financial’s categorization of loans

Type of loan Maximum loan amount
Microloans $75,000
Small business loans $400,000

Microloans are also considered to be the superiorwhen compared to other financial products, like lines of credit. Although lines of credit can be more flexible, they can hurt your credit score and carry high-interest rates.

Another important feature of microloans is that they offer short-term finance. You would have to repay the principal along with interest within a few months. Typically, the loan payback period extends for a year.

At Camino Financial, we offer small business owners more time to repay the sums that they borrow from us. Microloans have a maximum loan term of 24 months. Your monthly installment would be far lower with a two-year loan than a loan that has a term of only 12 months.

And out microloans can cost as little as 19% per year. At the upper end of the interest range, we charge 34%. Additionally, there’s a one-time origination fee of 6.99%.

With a microloan from Camino Financial, you are more likely to be in a position to meet your repayment commitments and build your credit.

What makes Camino Financial loans different from microloans from traditional lenders?

Young couple signing a contract on a meeting with investment agent in the office. Concept: Microloan vs payday loan

Payday loans

A payday loan is usually for quite a small amount. Most of these loans are for a few hundred dollars. Some payday lenders could advance you more than that, but if you want to borrow a large sum, say several thousand dollars, it’s usually better to look at other financing options.

Additionally, it isn’t only business owners who use payday loans. In fact, most borrowers use the funds from this form of financing for non-business purposes.

There is a significant advantage that these loans offer.

Getting a payday loan is easy. Just walk into a payday loan store, and in a few minutes, you could have the money that you need.

You probably won’t have any difficulty finding a payday loan store. According to a recent report issued by the Federal Reserve Bank of St. Louis, there were 14,348 payday loan storefronts in the United States in 2017. That’s a little more than the 14,027 McDonald’s locations in the country.

They do have downsides, though. The interest rates that these loans carry are astonishingly high. Your payday loan could cost you 200% or 300% per year. Rates of 700% aren’t unheard of.

In contrast, microloans are far cheaper.

Here’s a map that shows the interest rates charged on payday loans in various states.

Payday losna APR rate US map. Concept: Microloans vs payday loans

Source: CNBC

With payday loans being so expensive, you would think that they wouldn’t be popular with borrowers. But the opposite is true. The application process is so simple and it’s so easy to get a loan that these loans are very popular.

A payday lender usually carries out a quick verification of your income and bank checking account. Repayment is required to be made from your next paycheck. You could be asked to provide a postdated check or give the lender the authority to transfer the borrowed sum along with interest directly from your bank account.

How many people does this form of borrowing attract?

According to a report from Pew Charitable Trusts, an independent nonprofit organization with a stated mission of serving the public interest, 12 million Americans use payday loans each year.

There’s another significant downside to payday loans that you should be aware of. Once you have taken a loan, it’s hard to get out of the debt trap that you could find yourself in. A large percentage of payday loans are taken to repay an earlier payday loan.

Alex Horowitz, senior research officer at Pew Charitable Trusts, points out “Right now, 80% of payday loans are taken out within two weeks of a previous payday loan because the loans on average take up one-third of the borrower’s next paycheck.

What about microloans vs personal loans?

Microloans vs. payday loans: features

If we carry out a comparison of the features of microloans and payday loans, we’ll see that there are marked differences. Here’s a table comparing the two types of loans.

 💵 Microloans Payday loans
Interest rates Far lower than the rates charged by payday lenders. A typical payday loan carries an APR of almost 400%.
Loan duration Usually, 12 months. Could be longer. Two weeks. Most borrowers take a new payday loan to pay off the earlier payday loan.
Loan amount Up to $50,000. Some lenders offer even more. Payday loans are generally for $500 or less.
How easily can you get a loan? Your loan application will be approved if you meet the lender’s credit norms. It’s easy to get a payday loan. Usually, you just need to prove that you have a regular source of income and a checking account.

Microloans vs. payday loans: what they can be used for

Now let’s examine how you can use the money that you raise from these two types of loans.

Here’s a table that shows how borrowers typically use their funds from both types of loans.

Microloans* Payday loans**
Buying inventory Paying for food, rent, and utilities
Repairing equipment Paying credit card debt
Purchasing equipment Mortgage payments
Buying supplies Car payments
Paying employees Business expenses

 *Remember that when a lender provides you with a microloan, you can’t use the money for a non-business purpose. In fact, most lenders impose further restrictions, as well.
**Payday loans can be used in any manner. You can deploy the money in your company or use it for your personal expenses.

You can see that microloans are a source of funds for your business while payday loans are used for personal expenses.

Microloans vs. payday loans: differences and similarities

Although microloans and payday loans are widely different in many ways, they also share some similarities. Here’s a Venn diagram that illustrates this point pictorially.

Venn diagram. Concept: Microloans vs payday loans

Choose the option that will actually help your business grow

It’s very apparent that if you have to choose between a microloan and a payday loan, the former is a clear winner.

If your company requires immediate funds, consider applying to Camino Financial for a microloan. Our approval process is quick and easy, and it’s possible to get the money you need within a few days of applying.

Our motto is “No business left behind,” and our credit norms have been formulated keeping this in mind. Even borrowers without a credit history are eligible for a microloan from Camino Financial.

When you get in touch with us, our loan specialists will be happy to guide you through every stage of the application process and ensure that you get the funds you need at the lowest possible cost.

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