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Personal Loans vs. Payday Loans: What’s the Difference?

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Personal loans are lump-sum installment loans ranging from $1,000 to $50,000 or more that are issued by banks, credit unions and online lenders. Payday loans are small high-interest, loans, typically $500 or less, that are only issued by payday lenders. While personal loans are repaid in fixed monthly payments over months or years, payday loans must be repaid in full in about two weeks.

If you need quick access to cash, you might be considering applying for a personal loan or payday loan. Read up on the differences between the two, and why you should think twice before borrowing a payday loan.

What’s the difference between personal loans and payday loans?

Personal loans and payday loans can both be used to pay for virtually anything, and when you take out one of these loans, you’ll receive a lump-sum of money if you’re approved. But that’s about where the similarities end and the differences begin:

  • What is a personal loan? A personal loan is a lump-sum loan with a fixed APR that’s repaid in fixed monthly payments over a set period of time (typically two to five years). Personal loans can be secured or unsecured, depending on whether they require collateral.
  • What is a payday loan? A payday loan is a small unsecured loan, usually $500 or less, to be repaid with a fee within a short time period (typically two weeks). Since payday loan repayment terms are so short, they’re often “rolled over,” or borrowed again for an additional fee.

See the table below on the difference between payday loans and installment loans:

At a glance: Personal loans vs. payday loans
Personal loans Payday loans
Loan amount $1,000 to $50,000 Up to $500
Loan length 2 to 5 years 2 weeks
APR 6% to 36% APR ~400% APR
Credit check Yes No

Personal loans: Installment loans with fixed repayment terms

How personal loans work

When a borrower takes out a personal loan, a lender gives them a lump sum of money. The loan is repaid with interest in fixed payments over a set period of time, typically a few years. See an example of personal loan monthly payments below:

Cost of a personal loan
Loan amount $10,000
Credit score 720-759
APR 16.12%*
Repayment period 36 months
Monthly payment $352
Interest paid $2,678
Total cost of loan $12,678
*APR shown for demonstrative purposes.

Personal loans are typically unsecured, which means they don’t require you to put up collateral. Because of this, lenders rely heavily on your credit score and debt-to-income ratio when determining eligibility and APRs.

Some lenders offer secured personal loans, which are backed by an asset you own such as your car or your home. Secured personal loans may be a viable option for lower-credit borrowers, and they typically come with lower APRs than unsecured personal loans. However, you risk losing that asset if you default on the loan.

Benefits of a personal loan

  Personal loans are repaid in fixed monthly payments. Your monthly payment will stay the same, so you’ll always be able to budget for how much you owe.

  Personal loans may not require collateral. By taking out an unsecured personal loan, you don’t risk losing an asset you own such as your car or your home.

  Personal loans can be used for many reasons. You can use a personal loan to finance virtually anything, including:

Common uses for a personal loan
Credit card refinancing Debt consolidation
Home improvements Business expenses
Car financing Wedding expenses
Medical bills Moving expenses
Large purchases Funeral expenses

Personal loan pitfalls

  Avoid taking out an expensive personal loan. Personal loan APRs can run high, particularly for borrowers with bad credit. The higher the APR, the more the loan costs.

  Avoid borrowing more than you can repay. If you can’t repay your personal loan, you risk ruining your credit score. For secured loans, you also risk losing the asset you used as collateral.

  Avoid paying fees and penalties. You may incur an origination fee ranging from 1% to 8% when you borrow the loan, or be charged a prepayment penalty for paying off the loan early.

Applying for a personal loan

  1. Check your credit score. This will give you a better idea of what loan terms to expect. You can check your credit score for free on My LendingTree, as well as shop loans and more.
  2. Calculate how much you need to borrow. If you don’t borrow enough, you may come up short for a necessary purchase. Borrow too much, and you’ll pay interest on money you didn’t need.
  3. Prequalify with lenders. Many lenders let you prequalify with a soft credit inquiry, which won’t affect your credit score. LendingTree’s personal loan marketplace lets you prequalify with multiple lenders in our network by filling out a single form.
  4. Compare APRs, and choose the best offer. Typically, you’ll want to choose the personal loan that offers the lowest APR, since that loan will cost the least amount of money to borrow.
  5. Formally apply through the lender. Once you’ve decided on a lender, formally apply for the loan on their website. The lender will conduct a hard credit inquiry, which will affect your credit score.

Payday loans: Short-term predatory loans with high APRs

How payday loans work

Payday loans offer a fast way to get a small amount of cash without a credit check, but they’re expensive to borrow. Here’s how it works: A payday lender issues a small loan to be repaid using the borrower’s next paycheck for a fee, typically between $10 and $30 per $100 borrowed. The borrower either writes a post-dated check or gives the lender permission to withdraw the loan amount, plus fees, from their bank account on their next payday.

While some borrowers may be able to pay the full amount back within a few weeks, many borrowers have to “roll over” their payday loans into a new loan, incurring a new finance fee and increasing the cost of borrowing. Four out of five payday loans are rolled over, according to the most recent data from the Consumer Financial Protection Bureau.

See how the cost of borrowing and rolling over a payday loan can add up in the table below:

Cost of a payday loan when rolled over
Loan amount $300
Finance fee $45 ($15 per $100 borrowed)
Initial repayment period 2 weeks
Times rolled over 4
Total repayment period 10 weeks
Total fees paid $225
Total cost of loan $525

Benefits of a payday loan

  Payday loans don’t often require a credit check. Payday loans are guaranteed by the borrower’s next paycheck, so they don’t typically require a credit check. This makes them an alluring option for borrowers with bad credit or no credit.

  Payday loans offer fast funding. When you take out a payday loan, you may have access to the funding you need as soon as you apply.

  Payday loans can be used to pay for virtually anything. If you need money in a pinch to pay bills, then payday loans may seem like a convenient way to make ends meet.

Why are payday loans bad?

  Payday loan interest rates are high. Borrowing fees range from $10 to $30 per $100 borrowed every two weeks. If you roll over your payday loan enough times, you could end up paying around 400% APR.

  Payday loans have very short terms. Payday loans must be repaid by the borrower’s next paycheck, which is typically about two weeks. Some borrowers may be unable to come up with the full loan amount plus fees in that time period.

  Payday lenders trap consumers in a cycle of debt. If a payday loan borrower can’t repay their loan, they may be forced to take out another payday loan to cover the original balance. This essentially doubles the cost of borrowing, just for rolling over the loan once.

What happens if you don’t pay a payday loan? Payday lenders automatically withdraw the amount owed from your bank account on the due date. But if the check bounces or your account comes up short, the payday lender still has legal grounds to collect the debt they’re owed. The lender can report your delinquency to the credit bureaus, send your debt to collections and even take you to court over the debt.

How to get out of payday loans

Getting into a payday loan is as simple as handing over your financial information, but getting out of a payday loan isn’t so easy. Because they have such short repayment periods, the cycle of payday loan debt can be difficult to escape.

If you’re struggling to keep up with multiple high-interest payday loans, consider payday loan consolidation. This involves taking out a loan to repay multiple payday loans. For example, you could take out a personal loan or a 401(k) loan to pay off your payday loan debt and repay it in fixed monthly payments.

Borrowers who want to consolidate payday loan debt but can’t qualify for a traditional loan could also consider entering a debt management plan through a credit counseling agency.

Alternatives to taking out a payday loan

It’s hard to borrow money when you have no credit or bad credit, which is why payday lenders may seem like the only option for many low-credit borrowers. But if you need a loan with bad credit, a payday loan isn’t your only option.

Consider these alternatives:

  • Use a paycheck advance app. Paycheck advance apps let you borrow from your next paycheck, often without fees or interest. For example, Earnin lets you borrow up to $100 per day. The money is withdrawn from your account, and you have the option to add a tip.
  • Take out a secured loan. Secured personal loans are backed by collateral, which makes them less risky for the lender. If you own an asset like a car or house, you may consider taking out a secured loan — just make sure you can repay it to avoid repossession.
  • Find a payday alternative loan (PAL). PALs are small loans offered through a credit union. They’re worth up to $2,000 and have a max APR of 28%. PALs offer an alternative to high-cost payday loans, but not all credit unions offer them.
  • Talk to a credit counselor. Nonprofit credit counseling agencies can help with budgeting, financial counseling and debt management. These services often come at a low cost (or even no cost) to the consumer.
  • Borrow from friends or family. This option isn’t available to everyone, but it can be a much better alternative compared with going to a payday lender. If you decide to go this route, approach the subject with honesty and transparency.

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