Loans

Payday Loans vs Personal Loans: How We Warn

Finding the right loan for your needs can be a tough job, especially given the numerous types of loans available. We are here to help. While we are not a lender, we help consumers like you find the perfect lender (and loan type) to meet your personal needs. Do you need a quick fix or a long-term solution? What is the difference between loan types? Some of the most common loans available are payday loans and personal loans. But which is right for you? The first step is to understand the difference between payday loans vs personal loans. Both have their unique purpose and understanding that will help you find the right loan.

What is a Payday Loan?

Payday loans are often fast, short term cash loans that aren’t dependent on having good or bad credit. In fact, most payday loans vs personal loans don’t impact your credit at all. They are short term because the loan and interest are often due the following payday. Fast payday loans are smaller amounts of cash than other loan types, usually to solve an emergency or pay bills. One word of caution: short term cash loans can come with high interest rates and disreputable lenders. You can avoid the disadvantages of short term loans by finding the right lender. There are plenty of transparent lending agencies and fast payday loans available. Securing a safe and beneficial short term cash loan is certainly possible.

What is a Personal Loan?

Every now and then something unexpected pops up in life. Your house needs repairs. Your car breaks down. You need help with covering the cost of your wedding. If you don’t have an emergency fund in place–or it isn’t enough to cover the costs–that is where an understanding of the personal loan comes in. There can be any number of life circumstances that would lead you to consider a personal loan. A personal loan requires approval from a lender. Once approved, you will receive the money all at once, and then pay it back over time.

There are several factors that can impact your ability to get a personal loan. Some of these include the following:

  • Credit score
  • Income
  • Age
  • Income to debt ratio

Every lender and loan term is different for a personal loan. Often a low credit score will result in a higher interest rate on the repayment of your loan. According to this article on the basics of personal loans, lenders often require a minimum credit score of 580 to qualify for a loan. Lenders will also look at your income and your ability to pay back the loan. Some personal loans come with fees: application fees, administrative fees, and even fees for repaying the loan too quickly. These are all things to consider as you research the best loan type for you. No matter the type of a loan, you need to make sure you’re going to a credible company for your loan. Online options are great, so check these lenders out and see whether they are willing to give you a loan and send you an offer right now:

What Are the Key Differences Between a Personal Loan and a Payday Loan?

There are several differences between payday loans vs personal loans. While payday loans are short term loans, personal loans often have longer repayment terms. Bad credit does not impact a payday loan or the interest rate. Poor credit does influence the interest rate and amount of a personal loan. These are just a few of the differences between the loan types. Understanding the key differences between payday loans vs personal loans will help you determine the loan type that is right for you.

Key Differences:

  • Loan Term

    Payday loans are called short term cash loans for a reason. These loans usually require repayment by the following payday, or sometimes longer for a fee. Personal loans have longer repayment terms, sometimes up to five years.

  • Interest Rate

    Interest rates for either loan type vary depending on the lender and the state you live in. However, it is more common for fast payday loans to have much higher interest rates than personal loans. These rates are set by the lender and are not dependent on credit scores or income. With payday loans vs personal loans, interest rates can be in the triple digits. Personal loan lenders will look more closely at your finances to determine the interest rate of the loan. According to finder.com, “For a personal loan, you won’t have to pay more than 36% when you borrow. This is still a high interest rate, but it’s much lower than what you’ll get with a payday loan or other short-term loan.”

  • Amount

    Short term payday loans usually come in smaller amounts, anywhere from $50 to $1000. Sometimes more. Personal loans can be upwards of $50,000 with good credit. The amount between payday loans vs personal loans differs since the loans are used for different purposes. Short term cash loans cover basic emergencies and bills. Personal loans are often for larger amounts to cover events like weddings, vacations, or a home repair.

Other differences between payday loans vs personal loans include the lender. Personal loans often come from banks or credit unions. Payday loans come from specialized cash-checking businesses that are unique to each state.

Pros and Cons of Payday Loans

One of the biggest pros of fast payday loans is that it doesn’t impact your credit. Whether you have bad credit, decent credit, or really great credit, you can qualify for short term cash loans. If you don’t have quite enough to cover a bill this month, the payday loan can help. A quick $100 loan paid back with your next paycheck can get you out of a tight spot. There are also disadvantages to the payday loan. Understanding the pros and cons of payday loans is important to the lending process.

Pros of Payday Loans

  • No impact on your credit score

    With payday loans vs personal loans, you can get a loan without it touching your credit. This can be a great short term solution to an immediate cash-flow need.

  • No credit history required

    You also don’t have to have good credit to qualify for short term cash loans. Just a job, and ID, and perhaps a few other requirements depending on your state.

  • Small loan amounts available

    If you only need $50 to $200 to pay a bill or two, payday loans offer small amounts. You don’t have to get more than you need at the moment.

  • Fast distribution of the loan

    Payday loans are often sought because money is needed immediately. Payday loans offer an easy way to borrow cash quickly.

Cons of Payday Loans

  • High interest rates

    Get.com reports that “According to the Federal Trade Commission, payday-loan APRs have exceeded 390% in some states!” That’s a huge amount. They also state that the average interest rate is 15% a month, which is still a very high APR.

  • Hefty fees

    Typically a payday loan will be paid off by the time you receive your next paycheck. If something else prevents you from paying back the loan, there can be large fees involved. Because of their high interest rates and short repayment terms, payday loans can cause a cycle of debt. One unpaid loan can lead to another. Before long, you could be paying more in interest than you originally borrowed.

Pros and Cons of Personal Loans

Taking out a personal loan has its own set of pros and cons. Unlike the payday loan, personal loan interest rates tend to be lower and repayment schedules are longer. However, taking out a personal loan does impact your credit score. There are many reasons to choose a personal loan for your financial needs. In order to make the best choice, it will help to understand the good and bad of using this loan type.

Pros of Personal Loans

  • Lower interest rates

    Personal loans are influenced by your credit history. If you have a great credit score, it is possible to qualify for a loan with a very low interest rate. This is good news for your long-term financial goals.

  • Flexible use

    Personal loans can be used for just about anything. An article on loanry.com articulates that personal loan interest rates are often lower than a credit card. This means that personal loans can be used to consolidate high-interest debt. They can also be used for personal events like weddings and vacations.

  • Large loan amounts

    Just like the interest rate, the amount of your personal loan is dependent on credit history, among other things. However, with the right circumstances–good credit, steady income, limited debt–you could qualify for a large personal loan. This could be the solution you need for that next step in life.

Cons of Personal Loans

  • High interest rates

    If your credit history isn’t great, personal loans can come with high interest rates. This is largely dependent on your lender, the loan amount, and your credit history. What is a pro of personal loans, can also be a con.

  • Fees and repayment penalties

    Again, depending on the lender, some personal loans can come with unexpected fees. It helps to look at these details in advance before you sign the dotted line. There can be fees for applying and for administration costs. Some lenders even charge a hefty fee if you repay the loan early. This may seem counterintuitive: don’t you want to pay the loan back quickly? Some lenders don’t see it that way, however. It is important to know what you are signing up for.

Which is Better: A Payday Loan or a Personal Installment Loan?

There are many things to consider when choosing a loan. Knowing the pros and cons of each loan option is the first step. Asking yourself how your needs are impacted by the pros and cons is the second step. For example, Elite Personal Finance recommends asking these basic questions:

  • How much money do I need and for how long?
  • How is my credit history?
  • What is my plan to repay this loan?
  • How will this loan impact my credit score?

Your answers to these four questions can help you determine between payday loans vs personal loans. You now have the knowledge you need to find the best loan for your situation. Does your financial situation limit you from getting a personal loan? Will quick repayment of a payday loan hurt you next month? Knowing if payday loans vs personal loans are the better option is entirely dependent on your unique situation. Having all the necessary information sets you up to make the best decision for your finances.

Bad Credit Loan Considerations

You may be wondering how choosing payday loans vs personal loans tangibly impact your credit. There are things to consider when getting a loan with bad credit. While personal installment loans are themselves debt, they can also be used to help manage your credit. Personal loans can allow you to get a large sum of money quickly. This can go to pay down high interest debt. Having one low payment can help you make regular payments, pay down debt and improve your credit. However, a low credit score can also mean you don’t qualify for a personal loan. If you do qualify, the loan can come with higher interest rates and shorter repayment terms.

But not all is lost. There are ways to qualify for low interest loans when you have bad credit. Some lenders cater to customers with low or poor credit. While interest rates may still be higher than other lenders, there are options available to you. Make a list of several different lenders to compare what they offer in terms of interest rate, amount, and repayment schedule. You can use a loan calculator to help you determine the full repayment amount. This way you can ensure you have found the best option and are able to make your monthly payments. Using a loan calculator is also a great option as you compare payday loans vs personal loans.

Other Types of Loans for People with Bad Credit

Payday loans vs personal loans aren’t the only types of loans available. There are other loan types if you are struggling with bad credit. How do you find short term loans bad credit users can qualify for? This list of 5 loans for those with bad credit is helpful on your journey toward finding a loan. While we have already covered two loans, payday loans vs personal loans, a few other options exist.

Fast Cash Online Loans

Like payday loans, this loan type is quick and convenient. It doesn’t usually require a credit history and you can qualify and receive money in a matter of hours.

Short Term Cash Advance

This loan type is not dependent on whether or not you receive a paycheck. Most anyone can qualify, but the repayment term is very short, sometimes only a few weeks.

Credit Union Loans

Credit unions can often be more lenient than banks when it comes to offering loans. They will still look at credit score and income, but they also consider much more than just credit history. Credit unions can provide great loan options for users with bad credit.

What Is the Difference Between a Title Loan and a Payday Loan?

Now that we have compared payday loans vs personal loans, one other loan type comes up in the search for fast short term cash loans. Title loans. How do these differ from payday loans? The two loans are similar in that they both have high interest rates and very short repayment terms. They offer fast cash for an immediate cash-flow need.

You qualify for payday loans based on having a consistent paycheck. You qualify for a title loan by using your vehicle title as collateral. Cashry reports that “Most title loans come with a high interest rate of 25 percent a month, which is approximately a 300 percent APR. Since they must be repaid in full, these loans can also result in a cycle of debt when acquired on a regular basis.”

For title loans, the value of the vehicle must cover the loan amount. Most states don’t offer title loans higher than $5500, on average. However, the amount offered is dependent on the condition and value of the vehicle you are using as collateral. Like payday loans, title loans should be approached with caution due to high interest rates and short repayment terms.

Conclusion

Understanding the key factors of payday loans vs personal loans will help you on your financial journey. Both loan types have pros and cons to consider. Knowing your financial needs and how to meet them is the first step in choosing the right loan. We are here to help you not only understand loan types but also find the perfect lender. We making shopping for loans–as well as credit and real estate–easier and more efficient. Now that you know the pros and cons of payday loans vs personal loans, which loan is right for you?

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