When you need financial help for something that came up rather abruptly – a medical emergency, a pet getting sick, or car trouble – and you don’t have the funds for it, payday loans and personal loans can help. Both do not require any collateral. However, they are different in a way that one of them could be the more risky option.
In this article, we will quickly define the two, delve into the pros and cons of payday loans vs personal loans, and discuss which option is way better for being financially healthy in the long run.
What is a payday loan?
Also known as a cash advance or a check loan, a payday loan is an unsecured, short-term loan that lets you quickly borrow a modest amount of money – usually $500 or less. To qualify, you must be at least 18 years of age, have a valid government-issued ID, and have proof of income.
Sounds good so far? Here’s the catch: maintenance and origination fees can go as high as $30 per $100 borrowed. That’s an estimated 400% annual percentage rate for a two-week loan. To put things in perspective, the APR for credit cards ranges from 12% to 30%.
You usually repay the payday loan within two to four weeks when you get a paycheck. After that, you can either issue postdated checks or authorize them to withdraw money from your account. The latter option is risky, as you can incur fees for insufficient funds if you don’t have enough money in your account at the withdrawal time.
Payday lenders have legal grounds to collect what you owe them if you default on your debt. They can report your debt to credit bureaus, send your debts to collection agencies, or even take it to court.
What is a personal loan?
Now let’s talk about your other option.
You take out a personal loan by applying to a lender – a bank, credit union, or an online personal loan provider. You complete an application, the lender reviews it, and the lender either approves or denies it. Upon approval, you will receive the loan terms, and it will be up to you to accept or decline. Once you accept, you finalize the paperwork and get the funds. The loan proceeds usually come via check or direct deposit.
Personal loans have lower interest rates and fees than payday loans and have more extended repayment periods. In addition, monthly payments are fixed, making them more manageable and predictable.
As for accessibility, some online lenders offer personal loans through their websites. You can complete the application form online, upload the required documents, and then wait for the approval. There are instances when you can get the funding within 24 to 48 hours after loan approval.
Payday Loans vs Personal Loans: Quick Overview
Both loans let you borrow money and repay it in the future with interest. They can help you pay for emergency expenses and unexpected financial obligations. At a glance, here’s how they differ from each other.
- – You can get the funds quickly
- – There is usually no credit check required
- – The interest rates are high
- – There can be significant fees and hidden charges
- – They can potentially trap you in a cycle of debt
- – You can get the money in 7 to 10 days or as fast as 24 hours
- – They offer fixed interest rates making the monthly payments predictable and more straightforward to budget for
- – They have lower interest rates than payday loans
- – They require a credit check
- – They may tempt you to borrow more than you need due to the higher loan limits
Which is a better option?
Payday loans may be a good option for small unexpected expenses. However, they come with higher fees. If you cannot repay the loan on time, rolling over the debt will cost you new fees that will pile on top of your original debt. This could put you in a worse financial position. If the amount you need is small and you can afford to pay it back on your next payday, consider other options, such as borrowing money from friends and family.
On the other hand, personal loans are suitable for more considerable one-time expenses. The payments are spread out evenly over many months – up to five years – depending on the loan terms offered to you. In addition, the interest rates are way lower than payday loans. Most credit unions offer APRs that are comparable to credit card interest rates.
For lenders to check if you qualify for a personal loan, they will have to check your credit score, which can cause a temporary dip in your credit rating. However, if you make prompt loan repayments, it can improve your credit score, making it easier for you to take out loans in the future.
In almost all situations, a personal loan is better than a payday loan. If you qualify for a personal loan, it will allow you to borrow a significant amount of money, give you more time to repay it, and charge you lower interest rates. If you need funds for an emergency or unexpected expenses, apply for a personal loan first and consider payday loans as a last resort.
Payment1 offers personal loans that don’t break the bank. They focus on your budget and ability to pay the debt comfortably. Contact us today and let our expert lending team help you sort your options.