Payday loan vs personal loan: What’s the difference?

Payday vs Personal Loans

Whether you’re short on rent or budgeting for a large investment, there are countless reasons to borrow money. A little extra financial backing is sometimes necessary to reach life’s goals, but not all loans achieve the same purpose.

In order to avoid high interest rates and fees, and best utilize borrowed money, it is important to know about the two most popular loan options on the market: payday loans and personal loans.

Payday Loan

Payday loans offer short term lending to those strapped for cash. Usually for the amount of $500 or less, this type of lending is designed to help people cover emergency costs or get ahead of bill delinquency. Payday loans require little-to-no credit, and your credit score is not affected by an inquiry. Virtually anyone can be approved for a payday loan, so they are popular for their convenience.

However, the accessibility of payday loans comes at a cost. Due to the nature of short term lending, which is not contingent on credit score, payday lenders make up for increased financial exposure through large fees.

Payday loans usually cost between $10 – $30 in fees for every $100 borrowed. When you are in a financial pinch this might seem like a negligible fee, but after crunching the numbers, you will see it actually adds up. According to the Consumer Finance Protection Bureau, a standard two-week payday loan with a $15 per $100 fee equates to an annual percentage rate (APR) of nearly 400 percent. For context, credit cards have an APR of around 10 percent.

A quick and easy injection of cash might seem enticing, but huge fees can make payday loans impractical. Dependency on payday loans can quickly lead to an inescapable cycle of debt, so they should only be tapped in the event of an emergency.

Personal Loan

Short term personal loans usually have a fixed interest rate and payment period which makes them a more stable alternative to payday loans. But this added security isn’t given to just anyone.

Unlike payday loans, personal loans require a credit check, which will slightly ding your score. Since lending is based off credit history, personal loans are a little more difficult to secure than payday loans if your credit is less-than-stellar.

Personal loans come in two primary forms: secured and unsecured.

  • Secured — Backed by collateral such as a car or house, secured loans come at a lower interest rate. In the event of missed payment or loan default, lenders can collect collateral to repay the loan.
  • Unsecured — A loan unattached to collateral will generally come at a higher interest rate. The bank has no way to protect themselves from loan default, so you make up the difference in interest payments.

Interested in getting a personal loan but worried your credit score is too low? Don’t worry. There are ways to improve your credit and get approved for that personal loan you need. In order to get your credit back on track, and secure the loan you want, consider partnering with a professional credit repair company. is an industry-leader in disputing false or misleading credit report items. On average, members see a 40 point score improvement in the first four months of their subscription.

Contact for a free personalized credit consultation and audit of all of your credit accounts, and start on the path toward better credit, lower interest rates, and loan approval.

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