Payday Loans vs. Personal Loans: Which one is Best for You?

Life is full of surprises with unforeseen costs. A sudden car repair or an unexpected medical bill can create a financial emergency. When an unexpected cost arises, payday loans or personal loans can help you manage expenses until you recover financially. But what sets these two types of loans apart?

Personal Loans
You may be more familiar with personal loans, which usually come with a more rigorous application process. Personal loans can have longer terms, lower interest rates, and can allow you to borrow higher amounts than payday loans.
According to the Chamber of Commerce's report on personal loans, there are now 21.1 million outstanding personal loans in the United States. Data from LendingTree’s personal loan statistics shows that these loans have a total balance of $249 billion. This popularity makes personal loans one of the fastest-growing types of loans in the US.

Payday Loans
Also known as cash advances or check loans, payday loans can give you access to cash immediately. These short-term loans are named for their quick turnaround. They can help people meet urgent financial needs until their next paycheck.  

Both personal loans and payday loans are unsecured, so you won’t forfeit any assets if you can’t make your payments. But that’s where the similarities end. Let’s dive into the main differences between them.  
1. How much money can you borrow? 
Like most traditional loans, you can apply for personal loans at banks and other financial institutions such as credit unions and online lenders. Some lenders may let you borrow larger amounts. This depends on your credit history, credit score, state of residence, and other factors. 
You can find payday loans online, with certain financing companies, or check cashers. They can have a much smaller maximum amount than personal loans depending on state legal maximums. 
 

2. Which type of loan has better interest rates? 
With personal loans, your credit score can be the biggest predictor of your interest rates. A higher credit score may give you a lower annual percentage rate (APR). Personal loans can be available for people with bad credit. This makes them a good choice for refinancing credit card debt or other high-interest debt.
By comparison, payday loan interest rates are straightforward. According to the Consumer Financial Protection Bureau report on payday loans, state laws determine the interest rates of a payday loan. These can range from $10 to $30 on every $100 borrowed. For example, a two-week loan with a $15 fee translates to an APR of about 400%. 
 

3. What is the application process like? 
Payday lenders may require you to be at least 18 years old and have: 

• A valid ID 
• Your bank account information 
• Proof of employment 

Upon approval, you can receive your money immediately.
Unlike payday loans, personal loans can take from 24 hours to a few business days to process. Lenders look at your credit score, credit history, and application. They use this information to see how risky you are as borrower.
 

4. What can you expect during repayment? 
For a personal loan, once your application is approved, you may have a few months to several years to pay back the loan and interest. With a fixed-rate loan, your payment amount remains the same for each period. This can help you better manage your payments with your budget. 
Payday loans, on the other hand, can be difficult to manage. Instead of repaying in monthly installments, borrowers must pay back the entire amount owed on their next payday. If you’re unable to make this payment, some lenders may allow you to take a second loan, for a flat fee, to pay off the first. This can quickly turn into a cycle of debt that is difficult to break. 
 

5. What about my credit score?
Paying your personal loan consistently and on time can help build your credit score and open more loan and interest rate options. Payday loan lenders often may not report on-time payments to credit bureaus. This means that paying on time will not affect your credit score. 
 

Which loan is right for you?
In most cases, personal loans prove to be a better option. Their predictable payments can make it easier for borrowers to pay back the loan without overwhelming themselves. Their potential lower interest rates also make personal loans a more practical option for many borrowers. Personify might be able find a loan that fits your needs. If you do not have a loan with us, you can check for loan offers at personifyfinancial.com/apply.
However, you may find yourself in a situation where personal loans aren’t a good fit and you may need a payday loan immediately. But, take care to consider the drawbacks of payday loans, as well. They may come with higher risks than traditional loans, so make sure you’re able to pay back the money immediately. Excessive interest fees are not the only thing to look out for; you can also get hit with overdraft fees if your lender withdraws from an empty account.  

Choosing the right loan for your financial situation 
When you need money quickly, it's important to know you have several options. Take your time to determine the best choice for your situation. Because this decision impacts your long-term financial well-being, carefully consider all available options. Understanding the variables involved will help you choose confidently.