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Payday loan vs personal loan

payday loans vs personal loans

In 2021, only 68% of all adults felt they could cover an unexpected $400 expense.1 When you need financial help to deal with an emergency, you can apply for quick online loans! Payday loans and personal loans are two standard loan options that consumers use for unexpected expenses. 

But when it comes to payday loans vs. personal loans, which is better? Learn the differences between the two below.

An Overview of Personal Loans and Payday Loans

Personal LoansPayday Loans
Loan AmountsTypically larger, often up to tens of thousands of dollars depending on creditworthiness.Smaller, often up to a few hundred dollars based on the borrower’s next paycheck.
Interest RatesGenerally lower, often between 5% and 36% depending on creditworthiness.Typically much higher, can reach up to 400% APR.
Repayment TermsLonger, often several years. Payments are usually made in fixed monthly installments.Shorter, typically due by the borrower’s next payday (usually within two weeks).
Credit CheckYes, lenders typically check credit history and score.Often no traditional credit check, but lenders may use alternative methods to assess creditworthiness.
Use of FundsCan be used for a wide range of purposes, including debt consolidation, home improvements, or unexpected expenses.Typically used for short-term financial emergencies.
EligibilityRequires proof of income, a good credit score, and sometimes collateral.Requires proof of income, an active checking account, and valid identification.
FeesMay include origination fees, late fees, and prepayment penalties.May include finance charges and rollover fees if the loan is extended.
*Please note that the specifics can vary based on the lender and the borrower’s financial situation. Always read the terms and conditions carefully before taking out personal or payday loans.

What Is a Personal Loan?

A personal loan is an installment loan that provides eligible borrowers with a quick lump sum. Borrowers pay off personal installment loans through monthly payments for a specified duration. You can borrow money for various expenses since personal loan amounts range from a hundred dollars to a few thousand. 

Various financial institutions offer personal loans. You can apply for personal installment loans at a bank or credit union. But remember that credit unions typically offer smaller loans than national banks. Suppose you prefer to save time and avoid unnecessary travel. In that case, there are online lenders that offer small and large personal loans. 

Personal loan lenders can offer secured or unsecured loans:

  • Unsecured Loans —An unsecured loan does not require collateral. A good credit score is typically required to qualify. Most personal lenders offer unsecured installment loans. 
  • Secured LoansSecured loans require collateral from the lender. Bad credit is typically okay because collateral protects the lender against default. 

Qualifying for Personal Loans

If you’re interested in getting approved for a personal loan, know that qualification typically depends on your creditworthiness and the information found in your credit report. 

Lenders will closely examine your payment history, debt-to-income ratio, and credit score. If you apply with a bank or credit union, your personal loan documentation must prove your income, residence, and identity. Although, some online lenders do not require any paperwork. 

Most lenders report personal loan payments to the major credit bureaus, which can help boost your credit if you make continuous on-time payments. But your credit score can drop if you miss a payment or experience financial issues. Missed payments may also appear on your credit report and remain for up to seven years. 

The Advantages of Personal Loans 

Unsecured personal loans offer many benefits for eligible borrowers. Read about some of the perks below. 

Flexible Repayment Length

When you borrow money through a personal loan, you can choose how much time you want for repayment. You can request a short or extended repayment length, depending on your financial situation! A short repayment term means saving money on interest rates, but your monthly payments will be higher. While an extended repayment length can help you keep more money in your pocket every month with lower payments. 

Decent Interest Rates

Before you apply for a loan, paying attention to the interest rates is essential. If the interest rate is too high, your monthly payments can quickly become a financial burden. Lower interest rates can help you keep more money in your pockets. Personal loans often come with competitive rates, which can significantly benefit your finances. 

Large Loan Amounts

Personal loan borrowers can apply for a small or large loan. For example, if you need $5000 to move out of your house, you may be able to get enough money through a personal loan! Don’t need that much money? Lenders also offer small loans for just about any expense. For example, you could easily apply for a $200 personal loan for something like the cost of a new pair of glasses. 

The Disadvantages of Personal Loans 

Every loan option has advantages and disadvantages. Before choosing between payday loans vs. personal loans, it’s essential to know the cons to make a fully informed decision. 

Eligibility Requirements

Getting approval for a personal loan depends on your income and credit score. You may have difficulty obtaining a personal loan offer if you have a bad credit history. Low credit scores can also make it hard for you to get affordable loan terms. 

Possible Fees

When you inquire about a personal loan, you must ask about fees before signing a loan agreement. Some lenders have hidden fees that cost you a lot, such as application and origination fees. However, you can avoid unnecessary fees by comparing lenders and asking questions. 

Taking on More Debt

Eligible borrowers can get larger loan offers with personal loans, but this can be detrimental if you borrow too much money. Taking on more debt can lead to serious financial problems. Borrowers may end up struggling to save money and keep up with other debt payments. A significant personal loan can quickly lead to a debt spiral. 

What Is a Payday Loan?

Payday loans, or payday cash advances, are quick cash loan options for consumers that need money between pay periods. Potential borrowers can apply for payday loans online or at a store location. 

Payday loans are short-term loans that borrowers must repay within two weeks. Borrowers are responsible for one single payment to payday loan companies, which consists of the principal balance, interest, and additional fees. If eligible for a payday loan, you can get up to a few hundred dollars for unexpected expenses. 

Potential borrowers typically need the following to be eligible for payday loans:

  • A steady income.
  • An active bank account. 

You can still qualify for emergency cash if you have a low credit score. Payday lenders do not consider credit for qualification, which means you could get approval despite bad credit. 

Lenders do not usually report payday loan payments to the credit bureaus, which means your credit score will not be negatively affected by a late payment. However, your credit score will suffer if the payday lender sends your unpaid debt to collections. 

The Advantages of Payday Loans

Payday loans are a convenient, fast cash option that offers consumers various benefits when they need quick emergency cash. 

Easy to Apply

The approval process for payday loans is quick and efficient. Payday lenders do not require a lot of documentation, which helps speed up the approval process. There are online payday loan options, so you can quickly get approval right from the comfort of your home. 

Fast Emergency Cash

If you think, “I need a payday loan immediately,” know that you can get one! Eligible borrowers could get money in their bank account within one business day. A payday loan could improve your personal finance quickly so you can pay bills on time.

Bad Credit Is Okay

A good credit score is unnecessary for approval, so you may only have to apply with one lender! You may not have to go through a credit check when you submit an application for a payday loan. Skipping a credit check can help you avoid decreasing your credit score by a few points. 

The Disadvantages of Payday Loans 

Although payday loans are a convenient loan option, you need to know some major cons. For example, many financial experts refer to payday loans as predatory due to deceptive lending practices.  

Short Repayment Lengths

The payday loan cycle is very short, only lasting two weeks. Payday lenders expect borrowers to repay the money using their next paycheck. But life is unpredictable, and you may not be able to repay the loan on time. 

When you miss a payment, the payday lender will usually renew the loan. A payday loan renewal is known as a rollover. Rollovers incur rollover fees, making it harder for you to pay off your debt. The average payday borrower has 9 transactions per year, usually from rollovers.2 

Low Loan Amounts

Most payday loans only provide eligible borrowers with a few hundred dollars. This amount may not be enough money to cover a financial emergency you are facing. Suppose your car needs a new catalytic converter worth $945. You may have to take out multiple payday loans, typically $500 or less. 

High-Interest Rates

Payday loans tend to have extremely high-interest rates. When payday loan interest rates are high, monthly payments become unaffordable, and it’s easy to fall behind on payments. Borrowers often get stuck in a debt spiral due to the high-interest rates offered by payday lenders. 

How To Calculate Interest Rates

Whether you get personal or payday loans, it’s important to understand how much you will end up paying to borrow money. But you may wonder how an interest rate is calculated on a payday loan or personal loan. 

Payday loans generally have higher interest rates, so it’s important to calculate how much payday loans will cost before you apply. The easiest option is to use online financial calculators. A loan calculator will tell you the total loan amount and interest cost. These details may influence your decision when debating between personal and payday loans. 

Most financial calculators will require the following information:

By inputting these details into an online calculator, you can decide whether or not it’s affordable to take out personal or payday loans.

Frequently Asked Questions About Payday Loans and Personal Loans

What are some alternatives to payday and personal loans?

Alternatives to payday and personal loans can include credit card cash advances, borrowing from friends or family, or seeking assistance from local nonprofits or charities. Some people also consider home equity loans or lines of credit. It’s important to weigh the pros and cons of each option when comparing payday loan vs personal loan options.

What happens if I am unable to repay a payday loan or a personal loan?

If you’re unable to repay a payday loan or a personal loan, you may face a number of consequences. These can include late fees, increased interest rates, and negative impacts on your credit history. The lender may also report your default to credit bureaus, which can further damage your credit score. In some cases, the lender may take legal action to recover the debt.

Who are the typical providers of payday and personal loans?

Payday and personal loans are typically provided by various types of financial institutions. These can include traditional banks, credit unions, and online lenders. Some payday loan providers specialize in short-term lending, while personal loans can be obtained from a wider range of sources.

Where can I find a reputable lender for payday or personal loans?

To find a reputable lender for payday loans and personal loans, it’s important to do your research. Check if the lender is licensed in your state, read customer reviews, and compare terms from different lenders. You can also check with the Better Business Bureau and your state’s attorney general’s office for any complaints or actions against the lender.

How can I get the best interest rate on a payday loan or personal loan?

To secure the best possible interest rate on payday loans and personal loans, consider improving your credit score, shopping around for the best rates, and understanding all the terms and conditions of the loan. Lenders often offer better rates to borrowers with higher credit scores. Also, different lenders may offer different rates, so it’s beneficial to compare offers.

What factors determine how much I can borrow with a payday loan or personal loan?

The amount you can borrow with payday loans and personal loans is typically determined by factors such as your income, credit score, and existing debts. Banks, credit unions, and online lenders will assess your ability to repay the loan. For payday loans, the amount is often smaller and based on your next paycheck. For personal loans, the amount can be larger and is often based on your overall financial situation.

Where can I borrow the most money from a payday loan or personal loan?

The maximum amount you can borrow varies depending on the type of loan and the lender. Payday loans typically offer smaller amounts, often based on your next paycheck. Personal loans can offer larger amounts, but the exact amount depends on your creditworthiness and the lender’s policies. Personal loans often have fixed monthly payments and are typically unsecured loans, meaning they don’t require collateral.

A Note From CreditNinja on Payday Loans and Personal Loans

Between payday loans vs. personal loans, which is better? Now that you understand how these loans work, you can make a fully informed financial decision. The best loan option depends on how much money you need and how much time you want to repay the loan. 

At CreditNinja, we believe in transparency; that’s why we offer free financial resources online. You can increase your knowledge of payday loans, personal loans, credit scores, and more. 

References:

  1. Economic Well-Being of U.S. Households (SHED) │ Federal Reserve
  2. 5 facts about payday lending │ ERLC
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