When searching for loan options, you may come across two very common loan types: payday loans and personal loans. These two loans come with their unique benefits and drawbacks.
Payday loans and personal loans fulfill different financial needs for borrowers, offering funds when necessary. Payday loans, offering short-term solutions, cover unexpected costs and usually require repayment on the next payday. Personal loans, however, can be used for various reasons and have longer repayment terms.
Payday loans are helpful for those who need fast cash and can repay it quickly. They are available even for those with not-so-great credit scores. Personal loans allow multiple purposes like debt consolidation or home improvements, usually at lower interest rates than payday loans. This makes personal loans more affordable for eligible borrowers with longer repayment periods.
Explore the differences between payday loans and personal loans with our comprehensive comparison guide.
Loan amount
Payday loans are ideal when you need a small to medium amount of money. For instance, because of an unexpected bill that has come in, or if you want to pay for an event like a wedding or party but can’t quite cover the costs on your own, but you will be able to shortly.
With personal loans, you can borrow larger amounts of money to take care of much bigger issues. For instance, such a loan could help consolidate other loans or make big purchases and pay for bills or daily needs like groceries.
Loan timeline
Payday loans are short-term loans. They are intended as buffers to get you through to your next payday. A typical payday loan is between two weeks and three months and must be paid back in full by the end of that timeline.
Personal loans are intended to be long-term loans. The initial lump sum is borrowed, and then the payments are made over a long period. This allows people to borrow larger sums of money without putting a strain on their finances when paying back.
Fees and interest
Payday loans are zero-interest if they are paid back in full on time. They do include a fee, which the company will inform you of upfront. Usually, the fee is a set amount per $50 or $100. No further charges are incurred if the loan is paid back on time. If the borrower defaults on the loan, they will be subjected to a hefty interest rate.
Personal loans have a lower interest rate, but since they will be paid over longer periods, the overall interest cost could be higher since the money is likely higher. Again, it’s important to recognize here which type of loan will speak most to your individual needs at the time.
Effects on credit
A payday loan doesn’t get recorded with the credit bureau unless the borrower defaults on repayment. Otherwise, the borrower’s credit is not checked, so payday loans can’t positively or negatively affect one’s credit.
The only way a payday loan could negatively affect someone’s credit is if they do not pay it back on time, then the lender will be forced to take them to collections, at which point the debt will be recorded on their credit.
Personal loans can positively and negatively affect a person’s credit right away. First of all, checking your credit too frequently or requesting loans can negatively affect your credit because it demonstrates that you can’t live within your means.
That said, having credit is the best way to build credit, so as long as you always pay more than the minimum payment and don’t ever miss any payments, a personal loan could help you build your credit up.
Payday loans vs personal loans: verdict
There is a place for both personal loans and payday loans. Payday loans are quick and easy to acquire but are shorter term. Personal loans may take longer and be more difficult to acquire, but they can be a long-term solution. The bottom line is that the loan you ultimately choose needs to match your current situation.
