Payday Loans vs. Personal Loans

There are several key differences between payday loans and personal loans. Many people do not understand the differences between different kinds of debt. If you owe $500 at the end of the month, what does it matter how that money was borrowed? This is a dangerous trap to fall into,  since the type of debt…


There are several key differences between payday loans and personal loans. Many people do not understand the differences between different kinds of debt. If you owe $500 at the end of the month, what does it matter how that money was borrowed?

This is a dangerous trap to fall into,  since the type of debt that you have affects all parts of the repayment process. Depending on different factors such as loan term and interest rate, borrowers may have completely different experiences when repaying the same amount of money. 

So what are the key differences between these two popular debt products: payday loans and personal loans. In this guide, we lay out the key differences, as well as the advantages and disadvantages of both types of loan.


What is a Payday Loan?

A payday loan is a short-term loan, with payment terms that tend to be much shorter than other types of loan. Their interest rates tend to be higher than most other types of loan, and the amount of money that is borrowed tends to be much smaller. Because their payment terms are so short, the borrower is generally expected to pay back the loan (with interest) in one lump sum rather than over several monthly payments.

Payday loans are generally valued for their convenience. They tend to be much easier to acquire than other types of loan. Payday lenders will often accept borrowers who have bad credit or a poor credit history, with some even offering no credit check loans. They are designed for borrowers who have a poor credit history and therefore limited access to other, more traditional debt products such as personal loans or credit cards. 

Most payday loans also have a maximum amount, around $500 or less, and carry significant fees. The Consumer Financial Protection Bureau (CFPB) claims that most payday loans have an APR of around 400%. Payday loans tend to be unsecured loans, and therefore have no collateral or assets to back them.

Payday loans are often criticized for creating a cycle of debt that is difficult to escape. This is because most borrowers who take out a payday loan find it  difficult to repay the amount borrowed before it is due. They are therefore forced to roll over the loan, interest, and fees, into an entirely new loan which itself has its own set of fees.

Payday loans also do not report their activity to major credit bureaus. So even if the borrower is able to repay their loan in a timely fashion, they will not see a boost to their credit score.


What is a Personal Loan?

A personal loan is a loan taken from a bank, a credit union, or an online lender. Like payday loans, personal loans are unsecured and therefore not backed by any collateral. 

Personal loan terms tend to be much longer than payday loans, often between two to seven years. In this way they are very different to payday loans in the way that they are used. Payday loans tend to be for short-term financial emergencies while  personal loans tend to be used for things like mortgages, car loans, cosmetic surgery, or fertility treatment.

 The amount that you are able to borrow  with a personal loan tends to be much larger than payday loans, usually between $1,000 and $50,000. Their interest rates are also much lower than payday loans, ranging from between 4% and 36% as opposed to the 400% offered by payday loans.

Like payday loans, the interest you will pay on the loan will depend on credit score, debt-to-income ratio and a variety of other factors. However, because of the lower interest rates, and higher amounts offered to borrow, personal loans are far harder to obtain than payday loans. They require a credit check and a good credit score and their application process is much longer than with a payday loan. 

Payday Loans vs. Personal Loans


How do Payday Loans and Personal Loans Compare?

The key difference between a payday loan and a personal loan is the terms. A payday loan is a short-term loan that is usually due for repayment within a month, while a personal loan tends to be repaid over at least two years.

Personal loans, as stated, have a significantly lower interest rate than payday loans. This means that they are advantageous if you are paying for an emergency or using the loan as debt consolidation. 

Payday loans have a far smaller maximum amount than personal loans, usually around $500 or even less. Conversely some personal loan lenders allow you to borrow up to $100,000.

As stated, payday loans are far easier to obtain than personal loans. Payday loans can be accessed online, and you can get the funds within the hour. With personal loans, there tends to be much more paperwork and can take several days to process.

Personal loans also show up on your credit report, while payday loans do not. If you take out a personal loan and make timely payments, you will see a boost to your credit score. Because payday loan lenders do not tend to report to the major credit bureaus, any timely payments to the loan will not be reflected in your credit report.

Both types of loans are unsecured, which means there is no property or asset to act as security for the loans. Basically, this means if you default on either type of loan, there is no asset that a lender can seize.


Payday Loans Personal Loans
Financial charge per $100 borrowed Application fee and loan origination Fee
High interest, can be 400% or more Interest is usually 4% to 36%
Not reported to credit bureaus (unless you are unable to pay) Reported to credit bureaus
Repaid in 2 weeks to a month Reported from 2 to 7 years
Usually can borrow $500 or less Can borrow from $1,000 to $100,000
Issued by payday loan companies
Issued by credit unions, banks, and online lenders


Should I Take Out A Payday Loan Or A Personal Loan?

Because of their far lower interest rates, personal loans will always be the less expensive option when it comes to a direct comparison between the two. However, personal loans are often far more difficult to qualify for.

 If you have bad credit  but need a small amount of money quickly, and are confident that you will be able to repay the loan in a timely fashion, a payday loan may be more suitable for you in terms of convenience and ease of access.

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