Payday Loans vs. Personal Loans
Payday loans have shorter terms than other personal loans. They also differ in borrowing limits, fees, interest rates, and types of lenders. Click to learn more!
What is the Difference Between Payday Loans and Personal Loans?
There is often confusion between payday loans and personal loans. Although they sound similar, they are very different loans. Looking at their names is one way to remember their main differences.
A payday loan is a form of cash advance. Payday loans allow borrowers to access needed cash until their next payday. Payday loans are ideal for unexpected cash emergencies that borrowers can pay off if once they receive their paycheck.
A personal loan is a loan based on credit history and income. The basic principles are:
- If you have a good credit history, you will be viewed as a good bill payer.
- If you have a stable income, you have the means to pay for your loan.
Payday loans range from $100 to $1000, a little more in states with looser regulations. The borrowing limit sets expectations early on. Payday loans are only for cash emergencies, payable within a few days.
Personal loans allow credit access from $2,500 to as much as $35,000. Common uses for personal loans include consolidating debt to pay off bills and financing large purchases.
Interest Rates and Other Fees
Due to the short-termed nature of payday loans, fees are simple. Typical payday loan interest rates range from 10% to 30% per 14 days ($10-$30 per $100 borrowed). The agreed interest rate stays consistent, even if the loan rolls over.
For example, if you borrow $375 at 15% interest, you will pay $431.25 for it when it is due. The initial interest is $56.25 ($375 x 15%).
If you fail to repay as agreed, the loan rolls over. You will pay $495.94 on the extended due date. The extra interest is $64.69 ($431.25 x 15%).
There are more types of fees and calculating them is more complicated. The four basic personal loan fees are interest fee, origination fee, late fee, and early pay-off penalty.
The average interest rate of payday loans is around 9% to 10% per month. The interest rate is either fixed or variable. The rate of a fixed-interest loan does not change throughout the payment schedule. Variable rates fluctuate based on the Fed’s prime rate or how the economy is going. It can go up and down throughout the payment schedule.
Lenders ask for origination fees from borrowers with lower credit scores. The origination fee is for administration and processing costs, they say. The typical origination fee rate is around 1% to 5%, depending on the lender and your credit score. If you take out a $20,000 loan and the origination fee rate is 3%, you will only receive $19,400 in cash. The $600 is the one-time upfront charge you pay.
A late fee is a penalty for failure to repay the loan on time. There is usually a grace period of 3 to 5 days after the due date. After that, there are fines. Personal loan lenders have different policies on late fees and how they calculate them.
When borrowers pay the loans off earlier, lenders cannot fully collect their expected interest. To make up for their loss, lenders make the borrowers pay an early pay-off penalty. The penalty is usually the amount of the remaining interest
Payday loans are short-term loans specifically designed to be due on the next paycheck. Failure to repay could result in interest charges and extra fees. Payday loans are short-term loans designed to be due on the next paycheck. Failure to repay could result in interest charges and extra fees.
Personal loans, as bigger loans, have more flexible repayment schedules. Smaller loans can be as short-term as a few months, while larger loans can be as long-term as ten years.
Nonetheless, borrowers have more freedom to choose how to repay their loans. Borrowers can choose shorter repayment schedules – small net interest, short-term, but big monthly installments.
Borrowers can choose longer repayment schedules – low net interest, long-term, but small monthly installments.
Payday loans are ideal as short-term solutions to minor cash emergencies. They are available even to the lowest income brackets. They give much-needed credit access to the less fortunate.
Personal loans are ideal as long-term solutions to financial needs. They are large loans that are ideal for large projects or investments.
Payday loans have higher interest rates, but personal loans are larger. Payday loans may ask for a higher percentage as fees, but the loans are smaller, the burden less. Personal loans may ask for a lower fee percent, but for large amounts, the commitment is heavier. Is a payday loan right for me? No one is immune to cash emergencies and financial difficulties. However, not everyone has emergency funds to turn to in times of dire need. Such loans can be essential and life-saving.
Loan Despite Bad Credit
Payday loans are ideal for people who need money right away but have bad credit. Payday loans recognize that even people with bad credit history deserve help. A payday loan is an option, no matter who you are.
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Borrow as You Can Pay
A payday loan is right for you if you need access to credit that you can pay off using your next paycheck. The simple rule is, do not spend what you do not have. Use payday loans only as cash advance on money you will have in a few days. If not, you must have a plan to earn or save the money you owe within a few days.
A payday loan is not a solution to all financial needs. It is specific and caters best only to selected situations. Like any other financial decision, think before you act. Think before you get a payday loan.
Amanda is a senior financial copywriter at AdvanceSOS. Amanda has been writing about finance since 2015. She graduated with a Master’s in finance from the University of Oklahoma. As a result, she has a wealth of experience and knowledge to share with her readers.