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NY Post
New York Post
7 Jul 2023


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

If you need to access cash fast, two popular solutions are payday and personal loans. Personal loans are typically fixed-rate loans with flexible payment terms that generally have lower annual percentage rates (APRs) than credit cards and other financing options. 

An APR is the annual interest rate charged on a loan or credit card, expressed as a percentage of the total amount borrowed or owed, including any fees or charges. It’s a more accurate view of your cost of borrowing than the interest rate alone. 

Meanwhile, payday loans are short-term loans with substantial APRs. As a result, you should avoid payday loans if possible.

Both are quick funding options, but they differ significantly in terms of costs. The table below highlights the crucial differences between them.

Payday loansPersonal loans
Time to fundSame dayGenerally one to five business days
Loan amounts$500 or lower$1,000 to $100,000
Average interest rateUp to 400% APR4.60%-35.99%
Credit checkNoYes
Repayment terms2 weeks1 to 7 years

A personal loan is generally less expensive than a payday loan, even when you borrow money for a longer period.

For instance, say you took out a two-week, $500 payday loan. Payday loans typically come with a fee of $10 to $30 for every $100 you borrow. With a $15 fee, you could expect to pay $575 for the loan.

By comparison, if you took out a $500 personal loan with a one-year term at 10.34% interest, your total borrowing cost would be $528.

You can find a payday loan online or in person. They are short-term loans that are typically due on your next payday (two to four weeks). To obtain a payday loan, you must write a postdated check for the loan amount plus fees, or allow the lender to access your bank account. 

If approved, the lender pays you by depositing cash into your account, writing you a check, or issuing you a prepaid debit card. You repay the loan with your postdated check or with an electronic debit from your account.

Payday loans come with extremely high fees and interest rates, which makes it difficult for borrowers to pay them back on time. It’s possible to take out multiple payday loans to make ends meet, but this leads to a cycle of debt that can be difficult to break.

If you don’t repay the loan, you’ll have to pay a fee to renew the loan, which can be costly. This increases your total cost of borrowing.

You can spot predatory lenders by looking for certain red flags. “A lender using aggressive sales tactics or encouraging you to borrow more than you can afford are bad signs,” says Leslie H. Tayne, financial attorney and founder of Tayne Law Group, P.C.

Here are some other signs to keep in mind:

Although payday loans have a few pros, you should only consider them as a last resort due to their significant drawbacks.

If you have bad credit and can’t qualify for a personal loan, explore cheaper options before taking out an expensive payday loan. Here are a few alternatives to consider if you need an emergency loan:

Personal loans are generally unsecured loans, meaning they don’t require collateral. If you’re approved for one, a lender typically deposits the funds into your bank account. Afterward, you repay the loan in fixed monthly installments, including interest. 

These loans are a better option than payday loans because they’re cheaper. Plus, personal loans have longer repayment terms than payday loans, allowing you to spread your payments over years instead of a few weeks.

Good to know: You can use a personal loan for just about anything. Popular uses for personal loans include debt consolidation, funding a vacation, and home improvement projects. But note most lenders restrict you from using funds for postsecondary education expenses, business, real estate, and investing.

Although personal loans are a better solution than payday loans, it’s a good idea to consider their benefits and drawbacks before applying for one.

The application process varies from lender to lender, but you generally take the following steps:

  1. Check your credit. Credit requirements vary by lender. Check your credit score before applying to see whether you meet a lender’s minimum credit score requirement. You can request a free copy of your credit report from AnnualCreditReport.com. If you have a credit card, your card issuer may offer free credit score monitoring.
  2. Compare lenders. To find the best loan option for you, compare rates, eligibility requirements, loan terms, and loan amounts from multiple lenders.
  3. Submit a formal loan application. Once you’ve found the best personal loan for you, submit a loan application. The lender will ask you to provide information, such as your birth date, Social Security number, and proof of income like recent pay stubs.
  4. Review and sign the loan agreement. If approved, the lender will send you a loan agreement. Review it carefully to make sure you agree with the terms of the loan before signing.
  5. Repay the loan as promised. After funds are deposited into your bank account or sent directly to your creditors, repay the loan as agreed to avoid late fees and damage to your credit.