Payday loan vs Personal Loans

Payday Loans vs. Personal Loans – Pros and cons

Payday loans are short-term loans with a high-interest rate, and personal loans are long-term loans with lower interest rates. But both personal loans and payday loans can be used to pay for almost anything, and if you’re approved, you’ll get a lump-sum payment.

If you plan to take out a payday loan or a personal loan to fulfill your financial obligations, you must know its benefits and drawbacks, which will help you make the best financial decision. So, here we go.

Payday loans – Pros

1. Fast loan approval process – Payday loans are easily accessible, and you can get instant cash within 24 hours. The loan approval process is fast, and all you need to submit is your identification details, paystub, and a post-dated check. Lenders will check all the details and process your application. If you’re lucky, you can get money within 30-minutes.

2. No credit check – The most significant benefit of payday loans. Lenders don’t check your credit score. Even if your credit score is 500, you can qualify for a loan, and the credit score is a significant factor. Lenders may reject your application if your credit score is low or charge higher interest.

Payday loans – Cons

1. High-interest rates – The average payday loan APR is 400%, and that’s too huge for borrowers, and most of them cannot pay such massive interest rates within a short period. According to the CFPB, 80% of payday loans are renewed, and borrowers pay a significant amount on interest and fees.

2. Short-term loan – Borrowers are required to pay off the total amount along with massive interests and fees within 14-30 days. Sometimes, borrowers have to make payments even before receiving their paycheck, which creates enormous financial pressure on them.

3. Small loan amount – The maximum loan amount is $500. If someone plans to buy a home or a car, they can’t do so with a payday loan.

4. Overdraft fees – Lenders withdraw money from the bank account when the borrower fails to pay off the loan. If there isn’t enough money in the bank account, the borrower must pay overdraft fees. That’s why payday loans are so expensive.

5. Can’t get a refund quickly- Tribal lenders are illegal in America. Unfortunately, most Americans are not even aware of this fact, and they don’t even know the difference between tribal lenders and legal lenders, so they get scammed easily. Even if borrowers know that tribal lenders are illegal, predatory lenders claim that their loan agreements are permitted according to tribal laws.

Borrowers are only required to pay the principal amount on the illegal payday loans. Hence they ask for a refund. But the lenders refuse to issue a refund.

6. Not reported to credit bureaus – Predatory lenders usually don’t report payments to the three credit reporting agencies. That means even if you make payments on time, that won’t be said on your credit report. Hence your credit score also won’t go up.

Personal loans – Pros

1. Low-interest rates – The interest rate is between 4% and 36%. Interest rates vary depending on your credit score, debt-to-income ratio, and other factors. An excellent credit score and debt to income ratio can help you get a personal loan at a low-interest rate.

2. Long repayment term – The repayment term of a personal loan generally varies between 2 and 5 years. So, you can get a lot of time to repay the personal loan.

3. Higher borrowing limit – The loan amount is impressive, at between $1000 and $50000. That’s enough money to buy big-ticket items. You can pay off your debts, cover your wedding expenses, and so on.

4. Improve your credit score – Unlike payday loans, payments on personal loans get reported on credit reports. On-time payments can help your credit score to go up.

5. Flexibility – An auto loan can be used for buying a car, and a home loan can be used to buy a house. A personal loan can be used for various purposes. You can use it to consolidate your debts, sponsor a wedding, go for a vacation, etc.

Personal loans – Cons

1. Interest rates can be high – Personal loan interest rates are higher for borrowers with a low credit score.

Moreover, if you have enough equity in your home, you can apply for a home equity loan, and its interest is lower than a personal loan.

2. May have to pay high fees and penalties – Some personal loans come with prepayment penalties and fees. The origination fees are usually between 1% and 6%.

Moreover, borrowers may have to prepayment penalties if they pay off the loan early.

3. Can increase your debt – You can pay off your debts with a personal loan. But it doesn’t address the cause of your debt. Unless you work on the grounds of your debt, you will be in a bigger debt problem.


There are two types of personal loans – secured and unsecured. Secured personal loans have lower interest rates than unsecured personal loans, but you have a risk of losing your assets in case of loan default. Payday loans are unsecured so that you won’t lose your assets, and you may have to roll over the loan with an additional fee.