If you're in a crunch and need money to cover the cost of an unexpected repair or another emergency, personal loans and payday loans are two financing options you may be considering.
But which option is better? This isn't a hard question to answer: personal loans for the win. In nearly every case, a personal loan is going to be better, cheaper, and safer than a pay day loan.
Yes, both options can get you the money you need quickly. But when it comes to deciding between a personal loan and payday loan, it’s important to understand how they differ and which makes most sense for you.
Pros and cons of payday loans
A payday loan is a short-term, high-cost form of credit. (Remember that term "high cost." We'll explain more in a minute.)
These types of loans are usually for relatively small amounts, such as $500 or less, and they're meant to tide you over until your next payday. Banks and credit unions don’t offer payday loans; instead, you’ll have to work with a specialty payday loan lender.
One pro: Most people can qualify for a payday loan regardless of their credit scores. Payday lenders look at your pay stub or other proof of income, and will often issue you the loan based on that information alone.
One pretty big con: Payday loans are notorious for having sky-high interest rates. According to the Consumer Financial Protection Bureau, a typical payday loan has fees that equate to an annual percentage rate (APR) of almost 400%.
Another con: Most payday loans have to be repaid in full within two to four weeks. If you can’t afford to do so, you’ll have to roll the debt over into another loan. Rolling over or renewing a payday loan can trap you into a cycle of debt, so be careful about applying for one.
Pros and cons of personal loans
Personal loans are a form of installment loan. You can use them for a variety of purposes, including car repairs, medical bills, home improvement, wedding expenses ... the list goes on and on. You may be able to borrow as much as $50,000.
Personal loans are offered by banks, credit unions, and online lenders. Lenders will review your creditworthiness — including your credit score, income, and debt-to-income ratio — when deciding whether or not to issue you a loan and to determine your interest rate.
Some pros of personal loans:
- They have lower interest rates: Payday loans may sound convenient, but they come with expensive fees. A personal loan is often a much cheaper option; you could qualify for a loan with an interest rate as low as 6.79%.
- They have longer repayment terms: While payday loans have to be repaid within a few weeks, you can spread out your repayment on a personal loan over the course of several years. A longer repayment term can make your payments more affordable and give you more breathing room in your budget.
- They have higher loan maximums: Payday loans tend to be for very small amounts. If you have a larger expense — such as a pricey car repair or need a new refrigerator — a personal loan makes more sense.
- You can get your money quickly: People often turn to payday loans because they can get money quickly. But personal loans can be convenient, too. With a personal loan, you can access your funds in as little as two business days.
There's only con we can think of, and it's actually designed for your protection:
- Personal-loan approval is not as assured as payday loan approval. Banks will take a look at your credit worthiness before they lend you the money. Unlike payday lenders — who may want you to default so you can roll your debt into a second loan — banks generally want you to be able to repay your debt.
Applying for a loan
If you’re in a crunch and need money to help you cover the cost of necessary expenses, applying for a personal loan is a better financial decision than taking out a payday loan. With lower interest rates and more favorable terms, personal loans are a cheaper form of credit.
If you decide that a personal loan is right for you, we suggest checking out Citizens Bank. You can get a rate quote in as little as two minutes, with no impact on your credit score.