What’s the difference between personal loans and payday loans?
While they may sound similar, they are vastly different financial tools commonly used by people with very different financial needs.
A payday loan is a “relatively small amount of money lent at a high rate of interest on the agreement that it will be repaid when the borrower receives their next paycheck,” as defined by the Consumer Financial Protection Bureau. A personal loan is an unsecured loan—so no collateral is needed—used to consolidate debt or pay for life’s big events.
But there’s a bit more to it than that. Let’s take a closer look at personal loans versus payday loans.
How Much You Can Borrow
Payday Loans: Payday loans are commonly small, short-term loans, with loan amounts typically ranging from $100 to $1,000.
Personal Loans: The amount you can borrow with a personal loan may range from $2,500 to $35,000. Popular uses for personal loans include paying off higher interest bills or paying for wedding expenses.
Payday Loans: These short-term loans often come with fees or finance charges.
These fees might be as much as 10-30 percent of your loan. That doesn’t include any additional late fees if you are unable to repay the loan on time.
Personal Loans: Depending on your lender, personal loans can come with their own set of fees. An origination fee is a fee deducted from your loan amount upon entering into an agreement. A 3-percent fee might not sound like much, especially compared to payday loans, but when applied to a $10,000 loan, it amounts to $300 for simply agreeing to the terms. Some lenders may also include a prepayment penalty if you were to pay off your loan before an agreed-upon time period.
The good news is that some lenders don’t include these loan fees, so you could avoid them if you do a little research on lenders. Discover Personal Loans, for example, doesn’t include any origination fees or prepayment fees as part of their personal loan terms.
Payday Loans: Perhaps the biggest potential hazard of payday loans are their steep interest rates. Consider that for a two-week loan, a $15 fee per $100 is equivalent to an annual percentage rate of nearly 400 percent. Now add any interest payments that result from failing to repay the loan in full, and you see how quickly interest charges can spiral out of control.
Personal Loans: Depending on your credit score, personal loans offer relatively low interest rates. For borrowers with a strong credit history, interest rates can be as low as 6.99% – 24.99%. Many personal loan lenders, including Discover Personal Loans, also offer fixed interest rates for the duration of your loan term. A lower, fixed rate combined with no origination fees can make personal loans an appealing proposition for borrowers.
Payday Loans: Payday loans are specifically designed for short-term use. These loans are typically due at the time of your next payday. Failure to repay the loan at that time could result in extra fees and interest charges. Some lenders allow borrowers to rollover a payday loan, which allows the borrower to pay a fee to delay loan payment.
Personal Loans: Personal loans are long-term loans that give borrowers a flexible repayment schedule based on their unique financial situation. Most lenders offer a range of 2-7 years to repay.
With many lenders, borrowers are free to choose a time frame that fits their needs. If the borrower is cash-flow conscious, he/she can choose a longer time frame to lower their monthly payments. Alternatively, a shorter time frame can result in significant savings on interest by paying the loan off faster, but may also incur higher monthly payments. These flexible repayment terms give the borrower more control and a more realistic framework for paying off their loan.
Types of Lenders
Payday Loans: Many payday lenders are legitimate businesses that are capable of helping borrowers in need of quick cash. Initially designed to help borrowers in the case of an emergency, these short-term loans require no credit check and have become financial stop-gaps for many low-income Americans. Without the means to pay back the loan, these borrowers may face a dangerous cycle of unpaid loans and sky-rocketing interest rates.
Personal Loans: Long-term personal loans are designed as responsible solutions to your financial needs, such as debt consolidation. That’s why they’re backed by some of the most recognizable brands in the industry, including Discover. When applying for a personal loan, be sure to read all of the fine print. If the lender includes high origination fees or closing costs, it might be time to look elsewhere.
Personal loans and payday loans are used in very different ways. While payday loans can be used in emergencies, they can lead to a damaging cycle of borrowing that leaves borrowers unable to catch up with rising interest rates and expensive fees.
Personal loans offer borrowers a long-term solution that can be managed responsibly.
If you’re looking for how to get a quick loan, know that personal loans can be attained in a matter of days.
In fact, Discover Personal Loans gives same-day decisions in most cases. Call our loan experts at 1-866-248-1255 to see if you qualify.