Payday Loans vs Personal Loans

Scroll down to find out the difference between payday and personal loans.

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Every day, lots of people try to find more information on borrowing money. There are several ways you could do this if you found yourself in need of some cash. Most lenders could have various loan amounts or loan terms available, so a little research is vital. And this involves looking at personal loans vs payday loans too.

We decided to put one of our freelance personal finance writer contributors on the case to bring you the details you should know before looking for any kind of lump sum.

What is a payday loan?

Payday loans work around your payday - that's why they got that name. A payday loan is a short term loan working over just a few weeks usually. It may help to think of it as a cash advance on your next paycheck. You'll pay interest on it, just as you would with any other loan, but you may well see a far higher rate involved.

This reflects the extremely short-term nature of payday loans, and it is one of the most important things to recognize about them.

Advantages of a payday loan

If you're worried about having a poor credit score, you may potentially find it easier to get a payday loan rather than an installment loan. The idea is that the lender only grants you the money until the next payday. This means they'll check your income to make sure you can meet the payment, rather than looking at your credit report.

Furthermore, if the lender agrees to forward you a payday loan, you'll often receive the cash in your bank account quickly - faster than you might for a personal loan.

Disadvantages of a payday loan

We've already seen that payday loan interest rates could be much higher than rates applied to personal loans. This reflects the fact that they usually only run for two or three weeks. You agree to clear the loan amount in full on the date given.

If you cannot repay your payday loan in time, you could roll it over... but be aware that doing this could incur far higher loan rates overall. Payday loans simply aren't designed to have for longer than the very short term.

Even if you only roll it over on one occasion, it could end up costing you way more than you originally thought for the borrowed amount. So, you need to know how to use them, when you may want to use them, and how it could financially affect you to do so.

Even when we use the term "payday loan" more freely to refer to small installment loans that could be repaid over a few months, it still comes with higher interest and lower available loan amounts.

What is a personal loan?

A personal loan is spread over a much longer period than a payday loan. Your credit history will be relevant to anyone considering you for a personal loan. The lender may want to know your debt to income ratio, your credit score, and further details from your credit report. All this means a credit check - something that may not need to happen with payday loans.

It's more common to get unsecured personal loans than secured ones. An unsecured personal loan simply means a loan that isn't supported or backed by anything of value. An item of value might be a vehicle or a property, for example. If you don't have any such items, you'll need to look for personal loans rather than secured installment loans. A secured loan won't be possible for everyone.

Advantages of a personal loan

They're commonly used for all kinds of reasons. Home improvements, financing a new car, consolidating debt, funding a wedding, and so on. You'll often have fixed monthly payments on personal loans ranging from small amounts up to several thousand dollars.

This gives you the reassurance that the annual percentage rate won't change and your payment won't either. Every month, the same payment goes out of your bank account, so you know when this happens and how much is involved.

Another perk is that lots of lenders offer these loans. You could look at a bank or credit union, for example. There may even be lots of potential lenders whose names you've never heard of. If you have a valid checking account to make payments from, the monthly repayments are straightforward if you set them up to go out on time each month.

Also, regardless of your credit history, you could find there are multiple options no matter what your credit check might reveal. Different corners of the lending market aim at different potential clients, so it may help to know where you stand with your score before considering any loans at all.

Disadvantages of a personal loan

Personal loan rates vary hugely between lenders such as banks, credit unions, or other financial services. Your credit score could influence the loan amount you're offered, along with the annual percentage rates applicable to that offer.

This means that you might get a more appealing interest rate and be able to borrow more if you've got an outstanding credit score. If it is a lot lower, lenders may not be willing to lend as much - and they may want higher interest on the cash to reflect your lower score.

You might also find other fees are attached, such as origination fees for setting up everything to do with the loan to start with. You can, however, check all this ahead of agreeing to anything, so you're always in control of what happens.

You could get better rates on secured loans rather than unsecured installment loans, but you'll need something of worth to make this a possibility. In many cases, people seek secured installment loans against their homes, which would mean risking the home if they couldn't make those repayments.

An installment loan might also come with an origination fee or other finance fee. You might also see a prepayment penalty attached, although this would only trigger if you attempted to clear the installment loan ahead of the agreed date. It's still something to be aware of though.

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Payday loans vs personal loans: Which is most relevant for specific circumstances?

Comparing payday loans with personal loans is a smart move. You should always understand the features and facets of each one. We've seen how different they are.

However, some individuals may compare payday loans with personal loans because they're looking to borrow money for a specific reason. So, we're going to cover some common reasons why you may look to borrow a lump sum of any size.

Debt consolidation

If you have medical bills, student loans, credit card debt, continual overdraft fees, or anything along those lines, you may think about consolidating those debts with a personal loan. Payday loans wouldn't fit in this scenario as the amount required would be too high.

However, installment loans are designed to be repaid over several years. You'd make a monthly payment from your bank account, repaying part of the capital along with interest. If you want to consolidate debt, crunch some numbers first, find out the current interest rates you're paying, and look for personal loan offers that might suit you better.

Cash advances

We're back into extreme short-term territory here. You could get this from a payday lender or go for a credit card cash advance. Of course, this does assume you've got a credit card you could use for this purpose.

Credit cards often have higher interest rates compared with personal loans, but could be far lower than payday loans. The loan amount must be repaid quickly to avoid paying far more in interest than is absolutely necessary. That said, personal loans aren't a good fit for this situation.

It's another way to see the difference between personal loans and payday ones.

Immediate cash for emergencies

There are times when you might need money immediately. You may not be able to wait until your next pay period to get the funds you need. Most borrowers opting for payday loans might do so because they need cash straight away. Personal loans could take longer to arrange than payday loans, so the latter could be more relevant in this scenario.

Note that most loans aren't granted immediately, but you could have the money much faster than you would if you had to go through the loan request for a personal loan.

Compare loans vs payday loans for other factors too

No matter what situation you're in or which online lender might be the more relevant one for you, checking the differences between a traditional loan and a payday one is always important. Maybe there's another reason why you're considering a payday loan vs personal loan. If so, compare them using the info we've given you above, so you can work out a sensible pick for you.

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Are you looking to switch from a payday loan to a personal loan?

It could be that you've already had personal and payday loans, so you know what the differences are. If you fail to repay your payday loans on time, you could get stuck with fees and more debt. This might tempt you to try and extend the payday loan until your next paycheck.

If you're looking to get out of this cycle, personal loans could be worth thinking about. You could request a personal loan for enough money to clear any payday loans you still have. Lenders will need to check your credit score when you make a proper loan request, something that payday lenders may not do.

However, online lenders may have installment loans aimed at those with anything from excellent credit scores to a far lower credit score.

Check your history

You could always check your credit history with the credit bureaus before looking at installment loans. This could help you find personal loans aimed at those in a similar credit score situation. All reputable lenders are registered with the Consumer Financial Protection Bureau, giving you further peace of mind when you're looking at various personal loans.

The bottom line, of course, is that however you might borrow money, you need to make sure you can afford the repayments. A personal loan spreads the repayments across several months and often across several years, whereas a payday loan cannot offer this possibility.

How might Loanza help you in your loan search?

If you've never used Loanza before, you'll find our online service refreshing to use. It's free, designed to help you speed up your search for a new loan.

Our online form requires a few answers from you before searching our panel of multiple lenders for a competitive offer. Your credit rating won't take a hit either because there are no hard searches until you spot a loan you think might work well for your circumstances.

Once you've given us the info we need, we'll scan our panel of lenders. You'll then be able to see all the details about that offer on the next screen. You don't need to go ahead if you don't think it suits your needs, but you'll have all the information you need to figure out whether you'd like to make a formal request for the loan.

Loanza's here to help speed things up whenever you're looking for a loan. We hope we helped you understand what's involved with payday and personal loan possibilities.

Remember that we're here to help you connect with a reputable lender, suitable to your loan needs and personal circumstances.Us our simple online form today to find a loan!

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