Personal Loans vs Payday Loans

Many people have financial needs that need to be addressed in a quick and timely manner. Because of this, they may choose to fill any financial holes in their lives with either a personal loan or a payday loan. Both are very common types of loans, but they offer completely different financial products. Here we will discuss the differences between these two common financial solutions.

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One of the main differences between personal and payday loans is the time frame that the loan occupies. For example, a typical payday loan is a high cost, short-term loan that gives people the money they need until they receive their next paycheck. Most of the time, these loans are made for small amounts, so they don’t work for covering major expenses. Someone who is taking out a payday loan is more than likely just a bit short financially between now and their next paycheck.

Contrast this with a personal loan, which typically has a fixed interest rate and a fixed repayment time frame. It’s common for a personal loan to have the lifespan of a couple of years and to be for larger amounts of money.

Interest Rates

The difference in interest between the two loans is remarkable. This is because a short-term payday loan will typically charge anywhere from $10-$30 for every $100 you borrow. Splitting the difference, if you are paying $15 per every $100 you are borrowing, you will be looking at an APR (annual percentage rate) of almost 400%! Obviously,these types of loans are for dire emergencies, and for the smallest amount possible.

A personal loan will have not only a longer lifespan but will also have a smaller interest rate. For example, if you compare personal loans it’s not out of the realm of possibility to get a 10% interest rate, which is obviously much cheaper than the payday loan. That being said, you typically are financing much more money than you are with a payday loan, which is usually capped in size, relative to your average paycheck.

Jurisdictional Issues

While personal loans are legal just about everywhere, certain states, such as Ohio, have all but wiped out the payday loan scheme as we knew it. This is because of the predatory interest rate involved in some of these places, and unfortunately, the “revolving door” that many of the nation’s poorest people are vulnerable to. Sadly, at most payday loan shops, they have a long list of regular borrowers that are continually digging a hole financially as they cannot get ahead after getting into this trap.

It is because of this that state governments, over the last few years, have cracked down on some of the practices, and therefore, it is a bit of a moving target as to guessing where this industry ends up. That being said, taking out a personal loan for $100 doesn’t make sense, so obviously there is a difference between the two loans.

Your Personal Credit

One thing that comes into play is your personal credit, especially when you are talking about a personal loan. Obviously, the lender will want to know whether or not you can pay them back, so they will check your credit report. This is like any other lending situation, as your credit worthiness will determine your interest rate. The better your credit score, the better the interest rate will be typically.

However, with the payday loan, most of the time, all you are going to need is a pay stub to show that you do in fact have a job, and credit checks are all but unheard of. A payday loan will not impact your credit score, so therefore, it neither hurts nor helps your credit history overall.

Fees and Penalties

As with all loans, there are going to be fees and penalties. We’ve already discussed the fees typical with a payday loan, and the exorbitant amount of interest that they charge. However, they also provide a service for a quick influx of minor cash.

However, if you find yourself not being able to pay the payday loan back within the typical two-week time frame, it’s typically going to cost you in several different ways, not the least of which being that you will have probably written a bad check to cover the loan when you took it out in the first place. This sets up a whole host of problems with your bank that can get quite expensive.

Personal loans aren’t exactly cheap to default on either. It’s very possible you could see penalties ranging anywhere from 15% to 40% if you choose not to pay back the loan.

However, many lending institutions will work with you if you let them know in advance that you have run into a short-term situation. Obviously, this is not the most optimal situation to find yourself in, but there is a longer-term relationship involved, so they might be willing to listen to you for a short-term problem. Another added bonus to a personal loan is that if you are diligent in making your payments, it will help your credit score down the road.

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