Personal Loan vs a Payday Loan

Ben Allen  | 

Sometimes, you just need more money than you have immediate access to. This might be because a new expense has come up, there is something you would really like but can’t afford, or a crisis has depleted your funds, and you have to survive until your next paycheck.

It’s important to know what your financial solutions are and in this article, we’ll cover two of them; small personal loans and payday loans. The reason both are covered here is because payday loans are a form of small personal loans, and it’s wise to know what each loan product brings to the table.

The Difference Between the Two

It’s important to know the difference between a typical, personal loan, and a payday loan. Payday loans technically qualify as a personal loan, but with some important distinctions.

A personal loan is an unsecured loan, meaning there is no collateral to collect if the loan isn’t paid. Unsecured loans like this have higher interest rates, and rely heavily on a person’s credit score for determining if a loan is approved. Once approved, you will then arrange with the lender to make payments on the loan overtime. Depending on the lender, most personal loans also have a minimum requirement of lending out $3,000 or more.

A payday loan is still a personal loan, but usually for a much smaller amount. To get a payday loan, you typically give the lender a postdated check in exchange for the loan that will clear the next time you get paid. Then, the borrower typically receives cash immediately for less than the check is worth in order to pay or buy whatever they need. When payday comes around, the lender then cashes the check in order to repay the loan. Missing the due date for a payday loan also has incredibly high interest rates and additional fees. The typical maximum limit for a payday loan is $500.

What about Small Personal Loans?

There is another option that relates to this, small personal loans. Typically, banks and lenders won’t loan less than $3,000 as they won’t turn a useful profit, but small personal loans are available from specific sources. Local credit unions and some online lending sites give out small personal loans to those with decent credit at fairly reasonable interest rates. The hardest part about getting a small personal loan is simply finding a place that does it.

It’s also worthwhile to consider using a credit card instead if you can pay off the loan quickly and only need a small amount of money.

The Benefits of a Personal Loan

In nearly every scenario, getting a personal loan is a better solution than a payday loan. You’ll get a better interest rate, reasonable payment plans, and the confidence of working with a respectable business.

If you need a large amount of money, getting a personal loan is the way to go. Most payday loans won’t go higher than around $500, but a bank or personal lender is open to many different sizes of loans, as long as you have the money and credit to back it up.

The interest rate is another benefit that favors personal loans. The average APR for a personal loan is around 18 to 28 percent, while the APR for a payday loan is 400 percent. The reasoning behind the APR on a payday loan being so high is because their loans are short term and they want to make some money of the loan. But that also means that if you miss paying off the loan, that interest can pile up to a staggering amount very quickly.

Getting a loan, large or small, through a reputable lender, also gives you options and flexibility. You can control how long you will be paying off the loan, which in turn gives you control of how much per month you’ll pay on it. Over the long run, you’ll pay more on interest, but that just means that instead of having no money at payday (like what happens with a payday loan) you will just have to scrape by a longer period of time.

Why Do Payday Loans Exist?

Payday loans aren’t exactly good, but they exist for a reason. There are people out there with poor credit and no savings that are in need of money to pay for some form of crisis. They don’t qualify for a small personal loan, and might not have access to a credit card. Payday loans are around to allow people in these types of situations the chance to get cash quickly in order to pay off a bill or expense. They provide a service some people need, but this type of loan can unfortunately often result in people just digging themselves further in debt.

That being said, payday loans should be a person’s final resort to solving a financial crisis. Always try to find other solutions before resorting to a payday loan, that way you have more flexibility and security with paying off a loan than simply handing over your next paycheck.  

It’s important to weigh your options when it comes to taking out a loan. Don’t just hit up a single lender, explore all possible solutions. That way, you can find the most favorable conditions for your situation, and minimize the consequences that can accompany borrowing money.


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Ben Allen is a freelance content creator and digital marketer who believes in helping small businesses succeed. He spends his free time bragging about his two daughters, eating stuffed crust pizza, and playing video games.

This post was updated August 1, 2017. It was originally published July 20, 2017.