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

Infographic with a chart outlining the differences between personal and payday 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

Personal Loans

"Payday loans usually follow a quick turnaround time, although the exact time varies for each lender," explains Shel Glina, General Manager, FaaastCash. "After approval, some lenders can give you the money within 60 minutes, while some may do it within one business day or more."

Kimmy Burgess, Manager of  CashInaSnap, adds, "You get the money in your bank account the next business day as the approval process of payday loans is fast and hassle-free."

"Personal loans will take you longer to go through the lender's process to be approved, and it will be much more difficult for you to be approved," says Logan Allec, a CPA and owner of personal finance site Money Done Right

"Perhaps the only drawback if you have the credit necessary to secure a personal loan is that, depending on the amount, they can take a few days to process," warns Chouche. 

"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. 

Payday Loans

Personal Loans

"A low credit score usually means consumers have to resort to a payday loan which can be obtained with no credit or bad credit," says Steiner.  

Bow how low is low?

Chouche observes, "If you need cash right away for an emergency or if your credit rating is below 580, your only loan option may be a payday loan. And these should be your last resort." 

With most personal loans requiring a minimum credit score in the 600s, if your score is in this range or lower, you may only be able to get approved at a payday lender. 

"It may be challenging to obtain a personal loan with poor credit history," advises Glina. However, "If your need is pressing but not immediate, and you have a credit rating of 670 or above, your best bet by far and away is a personal loan," says Chouche. 

Many personal lenders list a minimum credit score of 620, 640, 660, or 680; however, just having that score doesn't guarantee approval, as you may be rejected based on other criteria. 

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?

Payday Loans

Personal Loans

"Payday loans are much more flexible, and lenders usually only require that borrowers have a regular source of income to qualify," explains Williams. 

For the most part, "you must be 18 years of age, be a U.S. citizen, have steady employment, and not an active member of the military," to qualify for a payday loan 

Williams adds, "There are other regulations as well, but they vary from state to state."

"Personal loans offered by banks and credit unions have strict eligibility criteria, often requiring borrowers to have a good credit score and a strong financial background," says Williams.  

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?

Payday Loans

Personal Loans

"If you want to borrow anywhere between $50 and $1,000, a payday loan is the best option," suggests Burgess. 

However, be aware that there are many state restrictions governing how much you can borrow at a payday lender. As Williams informs, "many states limit payday loans to $500 or less." 

"You can request a personal loan if you require a considerable amount of money, say $1,000 to $50,00," says Glina. 

However, in some cases, you can borrow more. "You may be able to borrow as much as $100,000 with a personal loan," explains Williams, "though most lenders only offer around $50,000 to borrowers with excellent credit." 

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?

Payday Loans

Personal Loans

"Payday loans should only be used for short term emergencies," advises Robert Linker, Owner of  Family Debt Planning. He adds, "Don't get a payday loan unless it is truly necessary. If it's something you want (but don't need), finance it another way."

"Depending on your intention with the money, a personal loan will be a better option for a planned project, investment, or long term financial support," instructs Jared Weitz CEO/Founder United Capital Source Inc. 

Joe Toms, president of FreedomPlus adds, "Few restrictions exist on what you can use a personal loan for, but think carefully whether you really need it. You can use one to pay for a wedding, to fund home improvements, to pay for tiny homes, and much more. Plus, one of the primary uses of personal loans is to consolidate and pay off credit card debt." 

He adds, "Eliminating credit card debt is one of the best investments you can make, given interest rates on credit cards today. Because personal loans generally offer a lower interest than credit cards, and because there is a strict payment schedule, a personal loan could be helpful if you are truly committed to eliminating credit card debt."

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?

Payday Loans

Personal Loans

"Payday loans," explains Williams, "have short terms of two to four weeks. They are meant to be paid back on your next pay date."

 "If you are wanting to take out a smaller loan that you will be able to pay back in full anytime within about two weeks, then a payday loan is the right choice for you," says Allec.  

"Payday loans are meant to be extremely short-term loans and should not be used time and time again," warns Greg Mahnken, a credit industry analyst with Credit Card Insider. "If you can't confidently pay back the loan before your next payday, you should avoid a payday loan at all costs."

"Personal loans usually allow a minimum term period of 12 months and can continue until 7 to 10 years," explains Glina

"Most personal loans have terms of 36 to 60 months (some, like FreedomPlus, offer 24-month terms, too) with strict payment schedules," says Toms. "This will keep you on track to eliminate the debt in a timely way; there is no option to just make minimum payments and be paying back the debt for years and years (as is the case with credit cards). But it's critical to make all payments in full and on time. Otherwise, credit profiles will be impacted."

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

Personal Loans

"Payday loans are generally much more expensive, but they don't have strict credit requirements," says Williams. "The cost in payday loan is a fee-based amount that varies per $100 loaned. A general guideline is around $15 per $100 loaned but this varies from state to state."

"The interest rates on payday loans are substantially higher than a personal loan and something that many people get caught in a cycle of debt with," explains Weitz. 

Joe Toms, president of FreedomPlus advises, "A payday loan is typically not a good choice if you need to borrow money. Payday loans can have an annual interest rate of 400+ percent. 

In real terms, that means that over three months, a $300 credit card loan (charge on your card) at 16 percent interest would cost $12 in interest charges. 

A payday loan could cost $270. This shows just how costly payday loans can be compared to other forms of credit. 

Even worse, many people 'roll over' their loans, borrowing the loan again, rather than repaying it. One example from the FederalTrade Commission: the cost of three rollovers on a $100 loan could be $60. Over time, some people wind up giving more than half their incomes to payday lenders." 

"Personal loans are cheaper, with lower interest rates but have strict credit requirements," says Burgess

Interest rates are capped at 36 percent for the most part, but that isn't the only cost. "Personal loans usually charge an origination fee of 1–5 percent of the loan amount," says Toms. "So, they are best if you know it will take more than a year to pay off the debt. Otherwise, with the origination fee, the cost is generally too high."

You also need to look out for pre-payment penalties. These will be assessed if you pay off the loan too quickly. Be sure to read your agreement thoroughly and ask questions if it is unclear to you.  

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?

Payday Loans

Personal Loans

"Payday loans tend to be offered by lenders that specialize in short-term lending and check-cashing services," says Williams. These can be found online or at local brick and mortar stores in your community. 

On the other hand, "Personal loans are offered by banks, credit unions, online lenders, and peer-to-peer lenders," according to Williams. 

"The best venues to secure [personal loans]," Chouche tells us, "are through banks or credit unions. You can get a loan without collateral at a rate considerably lower than most credit card interest rates."

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.
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