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When you need quick access to money, there are several loan options available to you, including personal loans and payday loans.
Personal loans are installment loans with lower interest rates than other loan products, making them a viable option for many borrowers. In contrast, these are payday loans Short Term Loans which usually come with expensive fees. As a general rule, you should avoid taking out a payday loan and only consider it as a last resort.
Here’s what you should know about the difference between personal loans and payday loans and why you should exercise caution before signing a payday loan.
Payday Loans vs Personal Loans: What’s the Difference?
payday loan and personal loans are both unsecured loans that give you access to a sum of money upon approval. But these loans are more different than they are equal. Here is a breakdown of the key differences between payday loans and personal loans:
- Loan Amounts — Payday loan amounts range from $50 up $1,000, depending on the laws in your state. Most payday loans are $500 or less, according to the Consumer Financial Protection Bureau (CFPB). In contrast, according to the US Chamber of Commerce, personal loans range from $100 to $100,000 with an average loan amount of about $8,000.
- Refund Terms — Personal loan repayment periods are generally between 12 and 60 months (and sometimes longer). Payday loans, on the other hand, typically require you to repay your loan amount (plus fees) in a single lump sum payment by your next payday.
- Interest charges – The average interest rate on a 24-month personal loan was 9.41% in the first quarter of 2022 Federal Reserve data. Since interest rates on personal loans are often lower than credit cards, you can use them to combine multiple high-interest credit card balances into one lower monthly payment. Payday loans typically charge a percentage or dollar amount for every $100 you borrow. That fee is typically around $15, which effectively equates to nearly 400% annual percentage rate (APR) on a two-week loan, according to the CFPB.
- Impact on creditworthiness — If you have a personal loan, your lender will likely report your monthly payments to major credit bureaus, which can help your credit history if you make your payments on time. Unfortunately, payday loans don’t show up on your credit report unless your account defaults, which could negatively impact your credit score.
With Credible it is possible View your prequalified personal loan rates from different lenders, all in one place. And it doesn’t affect your credit score.
Pros and cons of payday loans
As with most loans, there are pros and cons to consider when it comes to payday loans:
- Easy to qualify — Because payday loans typically do not require a tough credit check, applicants with below-average credit ratings may qualify.
- Fast financing — It’s not uncommon to get payday loan fund within the same or next business day after your approval.
- High Fees and Interest — Payday loan borrowing fees range from $10 to $30 for every $100 you borrow for two weeks.
- Rollovers can lead to a debt cycle – In many states, payday lenders can offer you a rollover if you are unable to pay your loan by the due date. As such, you would only have to pay the loan fees while the lender extends the due date on your loan — resulting in more fees and more debt.
Alternatives to payday loans
If possible, avoid taking out a payday loan. If you need money immediately, you have other options, such as:
- Personal Loans
- credit cards
- Alternative payday loans (PALs) offered by federal credit unions
- Home Equity Loans or HELOCs
- Loans from friends or family
Personal loans are a cheaper alternative to payday loans. They usually come with lower interest rates and give you significantly more time to repay your loan than payday loans.
When you need urgent cash, personal loan financing from online lenders can take as little as a day, and lenders can often approve your application in minutes.
Instead of taking out a payday loan, consider applying for a personal loan. Many online lenders allow you to pre-qualify without affecting your credit score. If you don’t qualify for a personal loan, review your other options at this time.
BEST SMALL PERSONAL LOANS
How to avoid predatory lenders
Due to their high interest rates and fees and short repayment terms, payday loans can be viewed as a form of pirate lending.
Here are some warning signs from predatory lenders to watch out for:
- Does not display APR or fees — The law requires lenders to disclose the APR and fees on their loans, but predatory lenders can make that information difficult to find.
- Negative Consumer Reviews — Look at lender ratings Better business office, Federal Trade Commissionand trust pilot to see if a lender is trustworthy. If the vast majority of the reviews you find are negative, you should stay away from this lender.
- No income or credit check — Personal loan lenders typically determine your likelihood of repaying a loan by completing a loan application and asking you to submit documents proving your income. If a lender does not verify your income or Check your credit historyit could be a sign of predatory lending.
- Encourages Repeat Borrowing – Predatory lenders can encourage borrowers to roll over their loans or refinance into a new loan, which can lure you into a debt cycle.
Payday loans almost always come with significantly higher costs and risks than personal loans. With a lower interest rate, longer term, and larger loan amounts, a personal loan is a better option than a payday loan when you need money urgently.
If a personal loan is right for you, visit Credible quickly and easily Compare personal loan rates from different lenders to find one that suits your needs.