Payday vs. Personal Loans: Which is Better?
Many of us need to borrow money sometimes to take care of unexpected expenses. Maybe the automatic transmission on your car suddenly refuses to change gears and you need to have it repaired. Or perhaps you received an unexpected medical bill that needs to be paid — quickly.
Whatever your need, it’s good to have options when it comes to financing, and two popular loans for obtaining some quick cash are personal loans and payday loans.
But, what are the real differences between personal loans vs. payday loans? Is one better than the other? Or, should you choose depending on your financial circumstances?
Keep reading for an overview of how payday and personal loans work so you can decide which option is best for your needs.
How Do Payday Loans Work?
Payday loans are offered by private lenders for relatively small amounts of money – usually $500 or less, although they can be more in some cases. They are easy to apply for, and the money can be used for many different purposes.
Payday loans are very short-term loans. The full amount of the loan is due the next time the borrower gets paid (hence the name). That means the term for these loans may not be much more than 2-4 weeks.
Payday loans have very high interest rates. For every $100 that you borrow through a payday lender, you can expect to pay $15-$30 in interest. Some states regulate the amount of interest that payday lenders can charge. Other states prohibit this type of lending arguing that it’s a form of predatory lending targeting those who can least afford it.
How Do You Qualify for a Payday Loan?
Payday loans are easy to obtain, and many lenders don’t even do credit checks. Qualifications for payday loans typically include:
- Being at least 18 years old
- A checking account from a bank or credit union
- Proof of employment and verification of income
- Valid identification
When you apply for a payday loan, lenders generally require you to sign a post-dated check for the full amount of the loan plus interest. Some lenders will also require you to authorize an electronic payment. If you don’t repay the borrowed money when it is due, the lender will go ahead and either process the check or withdraw the funds from your bank account.
How Do Personal Loans Work?
Personal loans are offered by banks and credit unions and can be used for various purposes. The amount you can borrow is typically between $5,000 and $50,000, although they are sometimes for higher amounts.
With a personal loan, you will receive a single lump-sum payment for the total loan amount. You then make monthly payments over a longer repayment term.
The terms for personal loans vary depending on the loan amount and the lender. The minimum term may be as short as a few months, but it can be as long as 10 years. These loans are also usually unsecured, which means that you do not need collateral to obtain one.
Interest rates for personal loans are significantly lower than the rates for payday loans. Rates are fixed but may be variable in some cases.
How Do You Qualify for a Personal Loan?
Personal loans are more difficult to obtain than payday loans. Information you will need to provide when applying includes:
- Requested loan amount
- Reason for the loan
- Employment information and annual income
- Other personal financial information
When applying for a personal loan, a hard credit check will be done. Hard credit checks do appear on your credit bureau reports, and they will temporarily reduce your credit score by a few points.
Eligibility for personal loans is primarily based on your credit score, how much debt you currently have, and your income. Requirements vary by lender, but in general, a higher credit score will help you secure a lower rate on your loan.
Personal Loan vs. Payday Loan: Which Should You Choose?
Choosing between a payday loan or a personal loan depends on how much you need to borrow and your credit history. For very small loan amounts, a short-term payday loan may meet your needs. Just keep in mind that the full amount of the principal and interest will be due the next time you get paid.
A payday loan may also be your only option if you have a low credit score. Since personal loans are not secured by collateral, credit scores are used by lenders to ensure that the money they lend will be repaid.
Overall, personal loans are a better choice than payday loans. While they involve more paperwork, you can borrow more money, interest rates are lower, and you can take significantly longer to repay the debt. However, these loans do require you to have a good credit score to qualify. Many lenders also have minimum loan amounts that they will consider.
Freedom Credit Union: Your Personal Loans Partner
Nobody likes unexpected expenses, but if you do find yourself short of cash, it’s worth taking the trouble to borrow a loan from a reputable lender who will give you fair terms and a reasonable interest rate.
At Freedom Credit Union, we’re focused on providing responsible personal loans that provide you with the cash you need when you need it, as well as reasonable terms that allow you to keep loan repayments within your means over the long term.
Our loans offer:
- Fixed low rates to keep payments affordable
- No monthly or prepayment fees, and no surprises
- Flexible terms so you can find the right repayment option for you
- A lump sum of money you can use for virtually anything – weddings, vacations, medical bills, debt consolidation, etc.
- No application fees
Ready for personal lending that actually works for you? Contact us today to learn more, or click below to get started.