Payday Loans vs. Personal Loans: Which Is Better?

If you’re interested in either a payday loan or a personal loan, odds are you need extra cash. Fast. But which of these options should you choose?

We’ll explain the key differences between how payday loans and personal loans function and the relative strengths and weaknesses of each choice. We hope that by the end of this article, you’re better equipped to choose the right one for your circumstances. 

Payday Loan vs. Personal Loan: Key Differences

There are two major differences between payday loans and personal loans: how much you can borrow and the loan terms. But let’s take a look at some other differences in more detail.

	Payday Loans	Personal Loans
Loan value	Usually $500 or less	Usually between $2,000 – $45,000
Repayment timeline	Repaid in 2 – 4 weeks in one lump sum	Repaid in 2 – 7 years in monthly installments
Fees and Interest	Fees and interest rates are extremely high, higher than any other financing option	Fees and interest rates can be lower than payday loans
Qualifications	Lenders don’t typically check your credit score to see if you qualify.	Lenders will check your credit score, debt-to-income (DTI) ratio and income history as part of your application
Impact on credit score	Usually aren’t reported to credit bureaus, which won’t help build your credit history	Often reported to credit bureaus, which may help build your credit history

How Payday Loans Work

A payday loan is one way to get a modest amount of money (usually $500 or less) fast, sometimes as quickly as an hour. Payday loans can cover unexpected expenses like small medical bills or car repair bills. Payday loans are usually unsecured, meaning that they don’t require collateral.

One of the reasons that payday loans are appealing is that lenders usually won’t do a credit check, which means that you can secure one of these loans even with bad credit.

On the flip side, payday loans have short repayment terms, usually 2 – 4 weeks, whenever you get your next paycheck (hence the name). They also have some of the highest interest rates of any financing option, which makes them even more difficult to pay off.

Payday loan rollovers

Some states let you roll your payday loan over to the next month if you can’t pay it off by its original due date. While the extension may bring some relief, it will also bring more fees and potentially create a cycle of debt that’s hard to break.

Even if you roll over your loan, you must pay its original fees by the due date. Your lender will give you another 2 – 4 weeks to pay off the loan plus its newly added fees (which may include a rollover fee).

How Personal Loans Work

Personal loans usually come as unsecured loans, although some lenders do offer secured personal loans. They typically range in value from about $2,000 – $45,0000, making them useful for everything from debt consolidation to emergency expenses.

After a lender approves your loan application, you receive the loan in one lump sum. Interest on the loan starts to accrue immediately, and your repayment term begins. Carefully calculating how much you need before applying for a loan can help protect you from paying more in interest than you need to.

Comparing Payday Loans and Personal Loans

Now that you understand what the key differences are and how each loan type works, we’ve compiled a list of their relative advantages and disadvantages so that you can start weighing these factors for yourself.

Payday loan pros and cons

One last factor to consider with payday loans is that they’re generally not reported to credit unions. This could either be a positive or a negative: if you struggle to repay the loan, it won’t adversely affect your credit. But if you make your payments on time they won’t build your credit either.

Personal loan pros and cons

When To Consider a Payday Loan

Payday loans are good for smaller, surprise expenses but come with high fees. Because lenders don’t look at your credit score to qualify you for a payday loan, a low credit score shouldn’t prevent you from qualifying for a payday loan – but they should be a last resort.

If the amount you need is small and you know you can pay it back by the time your next paycheck rolls around, it might be a better option than a personal loan.

When To Consider a Personal Loan

Personal loans are good for big, one-time expenses and are repaid over time with fixed monthly payments, plus interest. A personal loan may be a better option than a payday loan if you need to spread out payments over time.

Lenders will check your credit score to see if you qualify for a personal loan. If you have a low credit score and a spotty credit history, it will likely be harder to qualify for a personal loan.

Keep in mind that when a lender checks your credit, it can affect your credit score. If you can’t afford the temporary dip in your credit score, a payday loan might work better as a quick, last-resort option.

Alternatives to Payday Loans and Personal Loans

There are plenty of alternatives out there when it comes to borrowing money.

Lenders will look at your income to see if you qualify for a loan. Except for the payday alternative loan, lenders will also look at your credit report and debt.

• Payday alternative loan (PAL): PALs are offered by credit unions. You can borrow up to $2,000 and repay it in 1 – 12 months.^[2] PALs have much lower fees than payday loans and are regulated by the National Credit Union Administration.
• Home equity loan: A home equity loan lets you borrow a lump sum of money against the equity in your home. It’s a secured loan (which means the loan is backed by your home) and the interest rate on the loan is fixed.
• Home equity line of credit (HELOC): HELOCs aren’t quite the same as home equity loans. Like a home equity loan, you borrow against your home’s equity. Instead of receiving the loan as a lump sum, you get a line of credit to borrow from, like a credit card. HELOCs have variable interest rates, and you must have at least 15% equity in your home to qualify.
• Credit card: Credit cards are revolving credit accounts. You use the card up to its credit limit and pay the minimum or entire balance every month. Credit card interest rates are typically higher than the interest rates for personal loans, but you only pay interest on what you borrow.
• Personal line of credit: A personal line of credit is an unsecured loan that behaves a lot like a credit card. With a personal line of credit, there is a draw period where you can withdraw funds. At the end of the draw period, the loan enters the repayment period. The interest rates for personal lines of credit are lower than credit cards but usually higher than personal loans, home equity loans and HELOCs.

Final Thoughts on Payday Loans vs. Personal Loans

If you need to borrow some emergency money, you’ve got two options: a payday loan or a personal loan. But a payday loan will almost always cost you more money, putting you at risk of getting trapped in a relentless cycle of debt.

A personal loan allows you to borrow the money you need, gives you a longer period of time to repay it and comes with a lower interest rate than a payday loan. If your credit score and credit history meet the mark, it may be better to apply for a personal loan.