Let me guess. You’re trying to get on top of your finances, but you can’t decide if you’re going with a personal loan or a payday loan. Payday loans actually fall under the category of personal loans, and it gets even more confusing. Some lenders use these terms interchangeably, making it difficult to tell them apart.
It’s important to know the differences between the two. Whether you’re recovering from losses or struggling with debt or financial emergency, you must be fully aware and in control of your financial situation.
Payday loans are basically the loans that you take out and repay once your paycheck arrives. Payday loans require you to pay immediately in full on your next payday and they charge a flat fee. Personal loans on the other hand are hard to obtain if you have bad credit, require a stringent process depending on each individual institution but are generally more flexible with their terms. With personal loans you get charged interest for the length of your loan period.
In the following sections, we’ll be tackling the unique features of personal loans vs payday loans to help with your choice.
How much can I borrow?
Payday loan: Usually small amounts. Anywhere around $100 to $1,000, though you can borrow up to $5,000 depending on the lender and your income. (California CDDTL mandates a payday loan with max. cash in hand to a customer to be $255.00 with a payback of $300 to the payday loan company and a max. term of 31 days)
Personal loan: Larger amounts. On average, you can borrow between $2,500 and $35,000. However, there are lenders who can loan you as much as $50,000.
How much does it cost?
Payday loan: In California a 2 week $100 loan has a flat fee of 17.65 % and it breaks down to $85 cash in hand for the customer and a fee of $15 for the payday loan company. On their payday the client will be required to pay $100 back to the payday loan company.
Personal loan: The total cost of a personal loan is heavily dependent on your credit. It can range from as low as 4% to as high as 35.99%. Apart from interest, lenders may require you to pay an origination fee which is deducted from your loan amount before you can even get it.
Do I need collateral?
Payday loan: No. It is typically offered as an unsecured loan, so there’s no need for collateral.
Personal loan: Depends. Personal loans are available as both secured and unsecured options. If you opt for a secured loan, you will need collateral. But if you choose an unsecured personal loan, you don’t have to place your home, vehicle, or any property at risk.
How do I qualify for a loan?
Payday loan: Lenders who offer them are generally less strict with their requirements. You can still apply for a loan even if you have bad credit, rely on government assistance for income, or are currently on disability.
Personal loan: The eligibility criteria for these loans are less flexible. More often than not, you need good credit and a stable source of income to be approved.
Which is the right choice – personal loans vs payday loans?
It’s going to be different for everyone. If you have bad credit or need a small amount which you can repay quickly, a payday loan would be ideal. But if you have good credit, or perhaps need a larger amount which you can repay for a longer period, a personal loan works best.