Personal Loans vs. Payday Loans: What’s the Difference
At some point in their lives, most people will need to borrow money. While some people have a friend or family member who is willing and able to lend the necessary sum, this isn't always the best option. Furthermore, racking up credit card debt or using the equity in your home by putting another mortgage on the house are not always viable options.
In these cases, some people turn to personal loans and/or payday loans. They sound similar, but it’s important to note their crucial differences — especially before signing your name to anything.
In the following article, we'll address the differences between personal loans and payday loans. We’ll also touch on the pros and cons of each and offer recommendations for people who may be facing situations in which they need to borrow money.
What Are Personal Loans?
Personal loans are quite versatile and can be used for a variety of purposes — from debt consolidation and paying medical bills, to repaying friends or family or taking care of tax debt.
These loans do not require collateral. However, depending on the lender there will be terms, including how much your monthly payment will be, what interest rate you will pay, and the period of time you’ll have to repay what you've been loaned.
Personal Loan Pros and Cons
Personal loans have pros and cons. Let's examine both:
Personal Loan Pros
- Versatile: use them for a range of purposes, from student loans to taking care of medical bills or car repairs. You can even use them for “fun stuff” like purchasing boats, RVs, or going on your dream vacation.
- Competitive interest rates (especially when compared to payday loans)
- Fixed interest rates that won’t unexpectedly increase
- Same payment every month
- No collateral is necessary to borrow
- Once approved, you’ll generally receive the money relatively quickly in a lump sum
- Not just for those with excellent credit; some people with poor credit can also apply for a personal loan
Personal Loan Cons
- Higher interest rates than secured loans on average (though lower rates than payday loans)
- Penalties and fees may be charged (origination fees)
- Prepayment penalties may apply
What Are Payday Loans?
Payday loans get their name from the fact that lenders generally intend for borrowers to repay these loans as soon as they get their next paycheck. Therefore, it's no surprise that payday loans generally have short payback periods.
Another characteristic of payday loans is their high interest rates. These loans are usually requested when people are in a pinch. As a result, payday lenders hike up the interest rates and bank on borrowers not noticing. Borrowers usually need the money right away and don't have many options.
Generally speaking, payday loans can either be procured at brick-and-mortar locations or online. One advantage that many borrowers like is that credit checks are not a part of the payday loan "application" process. Therefore, if you don't have good credit and need money right away, it's an appealing option.
Payday Loans Pros and Cons
Now let’s take a look at the pros and cons of Payday Loans:
Payday Loans Pros
Payday loans are relatively easy to qualify for so it may be tempting to consider this type of loan however there are a number of factors to consider.
- Easy to access (usually obtainable 24/7)
- No credit check is required
- Few other requirements are needed (usually, all you need is a regular source of income, a government ID, and a bank account; you must also be at least 18)
Payday Loans Cons
- High interest rates
- Short payback period
- Easy to get into a cycle of debt
Are Personal Loans or Payday Loans Right for You?
Needing money on relatively short notice is not an uncommon predicament. You shouldn't necessarily feel out of control if this situation occurs with you. Emergencies happen.
It's important to find the right type of loan for your situation. Payday loans are commonly known as a predatory type of loan. They target people who are likely to get into a cycle of debt that they can never get out of, and you don't want that to be you.
A personal loan is a better option for individuals, couples, and families who simply need a financial leg-up but are also able to responsibly handle payments. They can even improve their credit in the process!
If you are interested in taking out a personal loan, talk to Peach State today! Fill out an online or apply in person at a local branch today!