Payday Loans vs Personal Loans: What's the Difference

When you're searching for loans, you'll quickly find out that there are many variations available. Two of the most common types you'll see for individuals are payday loans and personal loans. Before taking one out, it's worth understanding the finer points of the deal.

Payday loans are loans of concise terms. Most are due in full within one month. Personal loans have more extended repayment periods up to two full years. These types of loans also have a lower interest rate than the payday varieties.

Which One Is Right for Me?

The answer will depend entirely on what your situation is at the time. If you need instant $500 loan without much paperwork and you plan on paying it back right away, a payday loan will do the job. If you have more time to repay the debt and want a better deal than a personal loan will make more sense.

If payday loans sound like they're primarily for convenience, it's because they are that for most people. They're a form of a bridge loan that helps people avoid imminent disasters in the quickest way possible.

Payday loans have specific characteristics. Consider how each of them will impact your experience. Are you in the market for a loan like this to solve an immediate need for cash?

  • They are short-term loans for small amounts at a high-interest rate.
  • These loans are for emergencies primarily to cover cash shortages between paychecks, hence the name.
  • They are small, so they will not be suitable for purchasing high ticket items or for handling larger emergencies.

Payday loans are most appropriate to cover unexpected expenses under a few hundred dollars. If you need several thousand dollars, you may want to look into personal loans. Their fixed rates will mean it's easier to pay a flat monthly repayment, which may be the best deal after all.

Most Personal Loans Have Fixed Rates

A primary benefit of a personal loan is they use fixed rates, so there's no guessing about how much total interest you'll pay over the course of the loan. To qualify for a personal loan, people need to have good credit scores. If their scores are on the low end of the scale, they'll need to pay higher interest rates and will have more onerous terms.

Payday loans are generally more forgiving in credit matters. Since the loans are small end quickly, there's less for them to worry about in the long run. Personal loans tend to be for more significant amounts, so the underwriting process is stricter.

Since getting a personal loan is dependent on your credit score, it's worth finding out what yours is before beginning the application process. Most lenders will post their minimum requirements for eligibility so you can shop until you find offers where you qualify.

  • Personal loans are variable in quality, depending on your credit history.
  • These types of loans have terms of up to two years, which makes them a superior alternative to a payday loan for more substantial items or emergencies.

Deciding on the course forward will depend on your immediate needs and your financial standing. Payday loans are costly when used again and again. Personal loans have stricter requirements and longer repayment terms.

Credit Worthiness is the Deciding Factor

The decision on which loans to take will come down to your credit score. Knowing your score and your current ability to repay a loan are the key factors in your decision. If you only need a couple hundred dollars and don't have excellent credit, then a payday loan is a reliable option.

If your credit is a bit better and you want more time to pay back the loan, it's worth investigating personal loan options. Many financial organizations are fighting for business, so it pays to research for the best deal.

Find the Best Possible Deal

Low-interest rates are always the ideal option. The lower interest reduces the amount of interest you pay over a loan's lifetime. That money stays in-pocket instead of flowing into a bank's coffers, so that's always best. However, unavoidable situations will rear their ugly heads into life at times, so sometimes quick loans that you turn over rapidly really are the best option.

Personal loans may be a superior option if you're trying to build credit. They require stricter terms for approval and will report to the credit reporting agencies. On-time payments will improve your score, which will give you greater access to superior lending alternatives.

Loan products are worth researching because they represent such a substantial financial impact. Why not spend extra time up front to save money over the years? The right option will help you achieve financial independence, whereas picking a poor loan will put you behind.

As your credit score increases, the options available expand. You will find that you can get better loans as your history lengthens. As long as you consistently pay all your payments on-time, you'll be able to tap the benefits of personal or payday loans as well as have access to home, vehicle, and credit card accounts. Your portfolio may begin with a more straightforward loan, but that's only the beginning.