Personal Loan vs. Payday Loan: What’s the Difference?
Personal loans give you years to repay a lump sum, but you typically need fair to excellent credit to qualify. By contrast, payday loans place less emphasis on your credit history, but they come with sky-high fees and short repayment terms.
When you’re in a financial bind and need cash quickly, both options can help, but they’re meant for very different situations. Personal loans are best for consolidating debt, financing major projects, or covering an emergency expense, while payday loans are short-term funding that helps you cover your bills until you receive your next paycheck.
- While you typically have to repay a payday loan within two weeks, you can have several years to repay a personal loan.
- Payday loans provide fast access to cash, but they usually come with extremely high fees, ranging from $10 to $30 per $100 borrowed.
- Before taking out either kind of loan, consider other options like a credit card cash advance, paycheck advance app, or asking a loved one for help.
Personal loans vs. payday loans: At a glance
Although personal loans and payday loans both give you quick access to cash in an emergency, that’s all they have in common.
Personal loans usually have larger loan maximums, longer repayment terms and lower rates than payday loans. Payday loans are easier to qualify for, particularly if you have poor credit, but they have very short repayment terms and high fees.
| Personal loans | Payday loans | |
|---|---|---|
| Loan amounts | Typically $1,000 to $100,000 | Typically $100 to $500 |
| Loan length | Generally one to seven years | Generally about two weeks |
| APR | Typically 6% to 35.99% APR | Can reach 400% APR |
| Credit check | Typically, yes | Typically, no |
| Report to credit bureaus | Yes | Typically, no |
| Risk of debt cycle | Yes | Yes |
Consumer advocates define predatory loans as loans that the consumer cannot reasonably afford to repay, typically with annual percentage rates (APRs) of 36% or higher. Such high rates make it difficult to afford to repay the loan, worsening the cycle of debt.
Predatory lending can also be defined by unaffordable payments, deceptive practices and abusive collection tactics.
Too often, payday loan borrowers find that they cannot afford to pay back the money they’ve borrowed — plus any associated fees and their usual monthly bills — at the time of their next paycheck.
As a result, they end up paying a fee to renew or roll over a payday loan to delay repayment, which can mean getting trapped in an ongoing cycle of debt that can be hard to escape.
Which loan is right for you?
If you’re comparing a payday loan to a personal loan for bad credit, the best loan option depends on how quickly you need cash, the amount you want to borrow, and how much time you need to repay the loan.
Personal loans are typically the safer, more cost-effective choice, but if you can’t qualify for one, a payday loan may be an option. However, be sure to explore safer options such as payday alternative loans or payment plans first.
The table below breaks down which loan option is better based on your situation:
When a personal loan may be a good fit
- You need to borrow $1,000 or more
- You’d like one year or more to repay the loan
- You have at least fair or good credit and can qualify for a relatively low interest rate
When a payday loan may work
- You have poor credit and cannot qualify for other financing, such as a personal loan or credit cards
- You need less than $500 to cover a short-term emergency expense
- You’re confident you can afford to repay the loan by your next paycheck
If you’re not sure you can pay off your payday loan by your next paycheck, do not get one. This can trap you in a cycle of debt.
How does a personal loan work?
Once you’re approved for a personal loan, a lender gives you funds in a lump-sum payment. With a quick loan, you could even get funding within 24 hours. You’ll be expected to repay that amount, plus interest, over a series of fixed monthly installments. These recurring payments will typically last for a few years, until the loan is repaid in full.
Here’s an example of how your monthly payments could look, using hypothetical numbers:
Cost of a personal loan
| Loan amount | $10,000 |
| Credit score | 720-759 |
| APR | 16% |
| Repayment period | 60 months |
| Monthly payment | $243.18 |
| Interest paid | $4,590.83 |
Personal loans are most commonly seen as a form of unsecured debt, which means you likely won’t be required to put up collateral in order to be approved.
However, because these loans are riskier for the lender, they may have higher interest rates and stricter qualifying standards than secured loans. Unsecured personal loan lenders traditionally rely heavily on financial factors like your credit score and debt-to-income ratio to determine your eligibility and APR.
Pros and cons of a personal loan
Pros
- Personal loan funds can be used for many purposes: This flexibility means you can use a personal loan for medical debt, home improvement expenses or wedding costs, among other things. Typically, lenders only prohibit using a personal loan for college expenses, business purposes or gambling.
- Personal loan payments are fixed: Fixed payments are easier to budget around and can help prevent surprises since your monthly payment will always stay the same.
- Personal loans are usually unsecured: Personal loans usually don’t require any form of collateral, so you don’t have to put an asset at risk in order to qualify for a loan.
Cons
- Personal loans can have high interest rates and fees: Particularly if you have bad credit, personal loans can have high interest rates and origination fees, which will add more to your total cost of borrowing.
- Personal loans come with some risk: If you can’t afford to repay the loan, you risk damaging your credit score, as well as losing an asset if the loan is secured.
- Personal loans usually require good credit: To qualify for a personal loan, you typically need fair to excellent credit. Otherwise, you’ll struggle to find a lender willing to approve your application.
How does a payday loan work?
At their core, payday loans are small loans that can be funded quickly without a hard credit check. Loan repayment is typically due at the same time that the borrower receives their next paycheck, with the repayment funds and fees being automatically withdrawn from their account.
In exchange for their more lenient qualifying standards, these loans typically come with much higher fees.
A typical payday loan will charge $10 to $30 for every $100 borrowed. A two-week payday loan with a fee of $15 per $100 borrowed equates to an annual percentage rate (APR) of nearly 400%.
As a result, it’s easy for borrowers to get caught up in a cycle of debt, where they have to take out a new payday loan in order to pay off their old one in addition to covering their other monthly expenses.
Here is a breakdown of what your payday loan could look like, using hypothetical numbers:
Cost of a payday loan
| Loan amount | $500 |
| Credit score | 300-579* |
| APR | 391% |
| Repayment period | 14 days |
| Fee per $100 | $15 |
| Total payment | $575 |
Pros and cons of a payday loan
Pros
- Payday loans don’t require a credit check: Since these loans are backed by funds from your next paycheck, lenders typically don’t require you to undergo a credit check for approval.
- Payday loans offer access to fast funding: Since payday loan lenders do little due diligence to determine whether you can afford to pay back the loan, their funding times are often faster than some traditional lenders.
- Payday loan funds have few use restrictions: You can use the funds from a payday loan to finance virtually any expense, including paying bills if you’re in a pinch and need to make ends meet.
Cons
- Payday loans can have sky-high interest rates: Although payday lenders typically advertise their fees as an amount per $100 borrowed, when you compare the numbers, their typical APRs easily exceed 100%.
- Payday loans have short loan terms: You’ll be expected to repay a payday loan at the time of your next paycheck, which is typically about a two-week time frame. Some borrowers may not be able to come up with the funds to cover the loan amount plus fees within that period.
- Payday loans can start a cycle of debt: If you need to roll over your payday loan because you can’t pay it off on time, you may find yourself building up an amount of debt that is hard to pay down.
What happens if you don’t pay back a payday loan?
Payday loan lenders will withdraw the funds from your account on the day that your loan becomes due. They will do this either by depositing a post-dated check or, if you’ve provided them with your banking details, through an electronic transfer.
If there aren’t enough funds in your account when the withdrawal is scheduled to take place, a couple of things could happen: In some cases, your bank might cover the withdrawal and charge you an overdraft fee, costing you more money.
In other cases, the bank will decline the withdrawal, and the payday lender will be unable to access the funds it’s entitled to. In these cases, the lender may eventually send your debt to collections or even sue you for payment.
How to escape the payday loan cycle of debt
Borrowing a payday loan may be easy, but repaying it isn’t always as simple. Because these loans typically have such short terms, borrowers can often have trouble paying them back on time.
If you can’t afford to repay your payday loan, talk to your lender to request hardship assistance or for an extended repayment plan.
If you think you may need professional assistance to get out of debt, consider credit counseling. Counselors registered with the National Foundation for Credit Counseling (NFCC) can help you learn the skills you need to better manage your money and debts.
Alternatives to a payday loan
Borrowing money can be difficult, especially if you have bad credit or no credit at all. But that still doesn’t mean a payday loan is your only option. If you need money in a pinch, consider one of these payday loan alternatives:
| Best for… | Pros | Cons | |
|---|---|---|---|
| Paycheck advance app | People who are employed and need less than $500 for an emergency | No credit checks No interest Quick access to cash | May have monthly fees Limited advance amounts May leave you short of cash on your next payday |
| Credit card cash advance | Borrowers who have a credit card with an available credit limit | Quick cash access No additional credit check required No monthly fees | Cash advance APRs are high Cash advance fees apply |
| Secured loan | People with poor or fair credit who own a vehicle or other property | Lower rates than payday loans Larger loan amounts available | Risk of losing collateral Longer loan processing time |
| Payday alternative loan (PAL) | Credit union members who need a small emergency loan | Interest rates are capped at 28% Longer repayment terms than payday loans | Must be a credit union member Limited loan amounts Not available everywhere |
| Help from loved ones | People with a strong network of family and friends who are financially secure | Low to no interest or fees More flexible repayment terms | Can strain personal relationships May put family members in a difficult financial position Not always an option |
| Nonprofit emergency assistance | People struggling to afford necessities, such as rent or utility bills | Funding often available as a grant Additional support services may be available | Assistance is very limited Stringent eligibility requirements |
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