Payday Loans Vs. Personal Loans: Which Is The Better Option?

When you need fast funding, you have a number of loan options. Two of those options are payday loans and personal loans. While both loan types can provide the money you need in a short period of time, it’s important not to jump too fast and make a decision you might later regret.

Let’s take a look at payday loans versus personal loans to see how they differ and which is the safer financing option.

Payday Loans Vs. Personal Loans: How Are They Different?

Before you can determine which loan may be the better option for you, it’s important to understand the main differences between payday and personal loans.

• Payday loans: These short-term loans are lent in small amounts, typically up to $500, and often come with higher interest rates. The borrower agrees to repay the loan (plus fees) in full by their next paycheck. The entire lifecycle of the loan is usually 2 weeks.
• Personal loans: These are typically larger, lump-sum loans that are repaid in monthly payments with a fixed interest rate. Personal loans have a long loan term compared to payday loans. Rocket Loans℠ offers loan terms of 36 – 60 months.

For an at-a-glance breakdown of how payday and personal loans differ, see the table below.

How Are They Similar?

Although payday loans and personal loans are different in many ways, they do have a few similarities. Both are typically unsecured loans, meaning you don’t need to offer any type of collateral. With an unsecured loan, the bank can’t repossess anything from you if you default on your loan. However, defaulting on a personal loan can cause damage to your credit and impact your ability to borrow in the future.

Payday and personal loans alike offer fast funding, with few restrictions on how you can use the money. This means you can receive your funds shortly after applying, likely within the same day with a payday loan. Personal loans can take a little longer to disburse, typically 1 – 7 business days, but some Rocket Loans customers may be eligible for same-day funding if approved.*

How Payday Loans Work

A payday loan is only designed to get you by for a short period until you can repay the loan on your next paycheck. Because you can only borrow a relatively small amount of money, many borrowers in need of higher lending limits find that a payday loan may not be right for their situation.

Payday loans are meant to target individuals with bad credit and those who don’t have access to other financial options. Qualifying for a payday loan is fairly simple: You’ll need to fill out an application online or through a payday lender, and provide the lender with a signed check or permission to withdraw the funds from your bank account on the day the loan is due.

For your application to be approved, you’ll need to be 18 years or older, have a bank account and a valid ID, and be able to provide proof of employment. If you’re considering a payday loan, it’s best to first check your local state regulations since this type of loan is not legal in all states.

Payday Loan Pros And Cons

It’s safe to say that payday loans come with more negatives than positives. Here’s a look at the benefits versus the drawbacks.

• Pro: Payday loans have fewer requirements. With minimal guidelines and no credit check required to qualify for a payday loan, greater accessibility to funding is available for individuals with lower credit scores.
• Con: Payday loans have shorter repayment periods. With a shorter repayment period than a personal loan, a payday loan can make it difficult to come up with the money in time to pay the loan back in full.
• Con: It’s easy to fall into a debt cycle with a payday loan. One of the biggest downfalls of payday loans is the cycle of debt that many borrowers often fall into. If a borrower can’t repay their loan by the end of the term, they often have no other choice but to roll the loan, interest and fees over into a new loan. This new loan incurs a new set of fees, creating a cycle of payday loan debt that can be hard to escape from.
• Con: Payday loans have higher interest rates. Payday loans carry substantial interest rates, especially if a borrower is forced to roll their loan into a new one. In this case, the borrower may be faced with an interest rate of around 400% or even

How Personal Loans Work

Accessible through a traditional bank, credit union or online lender, personal loans are more widely available than payday loans. Because personal loans also have better loan terms and lower interest rates than payday loans and even credit cards, they are often the more popular choice for financial assistance. Interest rates will vary depending largely on your lender and credit score, but you may be able to obtain a decent interest rate with a higher lending limit than you would with a payday loan.

Personal loans can be used for many purposes, which include making larger purchases, debt consolidation and financing home improvement projects. Since personal loans can be paid off in monthly installments, this type of repayment structure is helpful for borrowers who like a set budget.

Personal Loan Pros And Cons

Personal loans tend to offer more borrower benefits than payday loans, as you can see in the pros/cons list below.

• Pro: Personal loans have higher lending limits. These loans have significantly higher lending limits than payday loans. With Rocket Loans, you can borrow $2,000 to $45,000.
• Pro: You have longer to pay a personal loan back. Unlike payday loans, which have very short terms, personal loans can be paid back with fixed monthly payments over the course of a few years.
• Pro: Personal loans can help your credit score. If you take out a personal loan and continue making your payments on time, your credit score may increase due to your timely payments. However, paying off a payday loan will generally have no impact on your credit score.
• Con: Personal loans have more requirements. To be approved for a personal loan, you’ll need to meet stricter qualifications than you would with a payday loan. These requirements include a strong credit score and a low debt-to-income ratio – both of which payday lenders don’t need to require.

Should You Get A Payday Or Personal Loan?

When choosing between a payday loan and a personal loan, your better option will almost always be a personal loan. Though a payday loan’s ease of accessibility may sound enticing, this loan may end up costing you significantly more in interest and fees than you originally thought.

Most people choose to use a payday loan when they believe their options have run out. It’s important, however, to ask yourself whether you’ll actually be able to repay this loan on time. If you’re not confident in your ability to do so, consider talking with a financial adviser who can help you understand your options and how you can qualify for a personal loan.

FAQs: Payday Loans Vs. Personal Loans

How do payday loans differ from other types of loans?

Payday loans have some of the highest APRs and shortest terms of any type of loan. The amount of fees tacked onto the loan can make payday loans some of the most expensive and riskiest loans to borrow.

Is a payday loan secured or unsecured?

Payday loans are typically unsecured, so a lender can’t take anything of yours if you default. However, the expenses involved in failing to repay a payday loan, plus the damage it can cause to your credit score, can be enough of a risk when taking on this loan type.

Do payday loans hurt my credit score?

Failure to repay a payday loan can significantly damage your credit score. Though payday loans aren’t typically reported to credit bureaus, lenders can sue for repayment or sell your debt to collectors, both of which could show up on your credit report.

Final Thoughts

Though a payday loan can give you cash in a pinch, a personal loan is by far the safer option. Personal loans can offer more manageable terms, reasonable interest rates and more cash – all subject to your creditworthiness, of course. Be sure to look over your finances before committing to any kind of loan, and always shop around for the best offers.

Ready to get the process started? Apply for a personal loan today.

*Same-day funding is available for clients completing the loan process and signing the Promissory Note by 1:00 p.m. ET on a business day. Also note, the ACH credit will be submitted to your bank the same business day. This may result in same day funding, but results may vary, and your bank may have rules that limit our ability to credit your account. We are not responsible for delays that may occur due to an incorrect routing number, an incorrect account number or errors of your financial institution.