Am I in the Market for a Payday Loan or a Personal Loan?

When you need money, most people take out a loan — but what type of loan are you looking for? If you aren't even familiar with the options, you may be wondering what the difference is between a payday loan and a personal loan, and which you should be researching and applying for. 

To understand which type of loan you are looking for, which you will likely be approved for, and which will best serve your needs, let's break down the differences between these two types of loans and the borrowers that they are meant for.  

Payday Loans vs. Personal Loans

"A payday loan is, in fact, a type of personal loan," explains Helen Chen, Director of My Cash Online, "however, it is provided for a short term (usually to cover costs until the borrower's next salary payment) and generally with high interest rates."

In the most basic terms, a payday loan is a short-term, small-dollar loan with high cost to borrow. As its name implies, it is meant to be paid back by the borrower's next payday. For this reason, this type of loan is often referred to as a cash advance or payday advance. 

What is a personal loan?

On the other hand, Chen says, "A personal loan is any amortizing loan provided for personal purposes, such as education, vehicle purchase, medical expenses or other personal expenses. They are usually unsecured, but in some circumstances may be secured against an asset or savings which can lower the interest rate and make it easier to get approval." 

In general, a personal loan is a longer-term loan that costs less to borrow, but loan amounts are higher than those offered by payday lenders. 

Is a payday loan or personal loan your best bet?

"If you are looking to take out a loan and are trying to decide between a personal loan and a payday loan," suggests Omar Chouche, CEO of Liberty Debt Relief,  the two most pressing questions you should ask are 'When do I need the money?' and 'What is my credit score?'"

So, let's start by asking just that. 

1. When do I need the money?

A large factor in your decision, as Chouche mentions, is how soon you can get access to your funds. Let's take a look at the difference between these two types of lenders: 

"Payday loans have faster turnaround time when compared to personal loans because less is involved in the approval process," observes Robin Williams, an executive at CashOne. However, this may not be the case for much longer. Williams adds, "with many personal loan providers moving online, they have the same processing time like the payday lenders."

"Personal loans can take several days for approval due to the documentation involved," confirms Chane Steiner, CEO of Crediful. However, Steiner notes, "If you have good credit and can afford being patient then personal loans are preferred as they typically provide a greater amount of money at a lower interest rate." 

2. What's my credit score?

The next thing to think about is your credit score. This is going to be the biggest deciding factor regarding which type of loan you can possibly get approved for, and therefore, which type of loan you should apply for. 

After getting these two fundamental questions out of the way, it is still important to know more before you apply for a loan at either type of lender. Check out these additional questions that consumers should ask themselves before applying for a loan.  

3. Do I meet the eligibility requirements for these loans?

When it comes to trying to get a loan, we often find ourselves backed into a corner by our financial past, as shown via our credit report. If you have bad credit, you are less likely to get approved for a loan of any kind; however, many payday lenders cater to customers with bad credit or no credit. That's how they stay in business.  However, Williams warns consumers that " even though many people with poor credit get payday loans, not everyone is approved for a payday loan." Even payday loans aren't a given. 

4. How much do I want to borrow?

Most states have restrictions about how much lenders can offer. "As mentioned above," Williams urges, "check your state website as there will be information about your state guidelines there." 

5. What do I need the loan for?

No matter your purpose for the loan, Toms instructs, "Ideally, you will save up for major purchases, and not take out a loan, to make sure you are living within your means." However, this isn't always an option for many Americans already struggling to live within their means, especially if something unexpected comes up. 

6. How long do I have to pay back the loan?

While payday loans come with a shorter lifespan, "Personal loans stretch out your payments over a longer period of time, and almost always at a more reasonable interest cost than a payday loan," clarifies Mahnken. "If you need a long-term loan, personal loans may fit the bill at a lower cost than payday loans."

7. How much does each loan option cost?

Payday loans are an expensive form of credit. "If you qualify for a personal loan," remarks Chen, "it is almost always a better option than a payday loan, as long as you have flexible repayment terms so you can close the loan early without penalty."

8. Who will be my lender?

When selecting a lender, Mary Jackson, CEO of the Online Lenders Alliance suggests that we ask ourselves: "Is this lending company reputable?"

"Unfortunately," Jackson asserts, "there are a lot of bad actors looking to take advantage of consumers who are in need of short-term credit options. As the CEO of the Online Lenders Alliance, our goal is to police the industry by not only finding and reporting these bad actors, but by setting a high bar and making sure our members meet it. 

Before any consumer takes out a short-term personal loan, they should review our code of conduct and best practices so they know what they should expect from a lender. 

For example, our members aren't allowed to use terms that mislead consumers — like "No Credit Check," "Instant Approval," or "Guaranteed." They should also look for the Online Lenders Association Seal, which will let them know that a lender has agreed to abide by our best practices. And if consumers encounter violations of these best practices as they seek the best credit option for their own unique needs, we hope they will report it to our hotline at 1-866-299-7585."

Final advice

Before you go, we will leave you with some final advice about how to best weigh the positive and negative aspects of both payday and personal loans, when it comes to your particular situation. 

Jared Weitz, CEO and Founder of United Capital Source Inc. — "A payday loan is a quick way to get cash in a pinch. However, if you are able to wait until your next paycheck or go through the process of applying for a personal loan, your finances will be in a better place."

Logan Allec, CPA and Owner of Money Done Right — "If you ask yourself, 'How quickly do I need this loan?', and you find that you answer ASAP/urgently, then you likely need a payday loan. 

Payday loans are after all a quick way to get cash, but they have an outrageously high interest because of how accessible and simple they are to get. 

The downside overall is that if you're in an emergency you will need to take out a payday loan and pay significantly higher interest. 

The upside is that you get the money when you need it for emergencies and don't have to wait for weeks and months to be approved for your loan."

Robin Williams, Executive at CashOne — "Last but not least, always remember that payday loans can help in emergency situations, but they are not for everyone. Careful consideration should be given before you decide to get a payday loan. Educate yourself, check your state website, and be sure you deal with reputable companies. Never, ever pay anything up front for any type of loan. These are scams run from offshore companies that often say they are from reputable companies but are not. They are just stealing your money. "

Joe Toms, President of FreedomPlus — "A personal loan is a good option for many. Borrowing from family or friends often is not the ideal alternative, but may be better than a payday loan as long as all is decided upon, written down, and signed. In some situations, even a credit card may be better. It's not wise to consider credit cards to pay off other debt, but under a careful program designed to get rid of high-interest payday loan debt, might be helpful. And if things are really tight, you owe $7,500 or more in unsecured debt, and are struggling to make minimum payments, look into debt settlement.

Would I benefit from a lower interest rate than if I put the purchase on my credit card? Credit cards can carry interest rates of 15-25 percent. Average rates on personal loans are 14 to 18 percent but can go as low as just under 5 percent to as high as 25 percent. Credit scores play the key role in setting the rate. 

Independent lenders offering personal loans, however, can look at different factors than would a bank or credit union. Some will talk with the applicant and let the applicant provide additional information about credit scores and profiles, savings, life insurance, and other factors that indicate they are financially responsible. Some lenders even offer discounted rates to borrowers who have a co-borrower or to borrowers with a certain amount of retirement savings."

Greg Mahnken, Credit Industry Analyst, Credit Card Insider — (As a personal loan alternative) "If you have good or excellent credit, you may qualify for a credit card with an introductory 0 percent APR rate. These introductory periods usually last between 6 and 15 months. If you can confidently pay off the balance before the introductory period ends, you'll pay no interest on these cards. 

1. If you do use a card with a 0% APR introductory offer, understand that you may need to pay more than the minimum payment in order to pay the balance off before the offer ends.
2. If you're using the introductory offer as a short-term loan, avoid putting other expenses on the card. This will make it more difficult to pay off before you're charged interest on the balance.