Payday Loans vs Personal Loans: What’s the Difference?

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what is the difference between payday loans and personal loans

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No matter if you’re looking to make a big purchase, an investment, or just need to get by on the monthly bills, you may need to borrow money. Having additional financial means is often necessary to reach your goals in life, but not all loans are created equal.

In order to get the most bang for your buck and avoid high interest rates and extra fees, it’s vital to understand the distinction between two of the most common types of consumer loans: payday loans vs personal loans.

Payday Loans 

Payday loans are designed as short-term loans that are meant to assist those who need a quick solution for cash. This may be due to an emergency, an unexpected expense, or help paying your monthly bills. 

In terms of payday loans vs personal loans, payday loans are for a much shorter term length and are often lower than $500 in amount. To take out a payday loan, you won’t have to worry about any credit checks or requirements. 

This makes payday loans popular— you don’t have to worry about approval if you have bad credit, as long as you have a source of provable steady income. Your income is typically verified through bank statement review and paystubs. 

Although they are very convenient, payday loans can be extremely risky. Because of the short term nature of the loan, there are extremely high fees associated with these types of loans. In addition, it’s easy to get stuck in a cycle of reborrowing. 

Payday loans typically cost anywhere between $10-$30 for every $100 borrowed. While it might not seem like a lot upfront, it adds up rapidly. The Consumer Finance Protection Bureau explains that a typical 2-week payday loan with a fee of $15 per $100 holds a nearly 400% APR. 

This 400% APR is astronomical compared to other types of loans and even credit cards. Credit cards, for instance, hold an APR of 10%, give or take. Even the highest-interest credit cards don’t typically surpass 36%. 

It may seem that payday loans vs personal loans offer you a simple solution for a cash infusion, the high APR and cyclical nature of these loans makes them an unwise choice. You may become dependent on having this income. 

Let’s say you take out a payday loan of $250 before your next paycheck, which comes in biweekly. You’ll be expected to pay back the loan on or before your next payday. If you still need the money, you can “renew” the loan, and pay it back on your next paycheck.

This will require you to pay the finance charge of $37.50, borrow the same $250, and then pay the loan back again in 2 weeks with the $37.50 finance charge. That means for the same $250 you’re ultimately paying $75. 

This illustrates the impracticality of payday loans and the predatory nature that the high fees perpetuate. 

Personal Loans

Short term personal loans are also available, and may be a better option when considering payday loans vs personal loans. They have a fixed interest rate and payment period, making them more practical than payday loans. 

That said, personal loans aren’t given out to just anyone— personal loans require a credit check, whereas payday loans do not. If you have lower-than-average credit, it may be more difficult to take out a personal loan. 

There are two types of personal loans: secured and unsecured. 

  • Secured personal loans: these loans are given with collateral backing, using your car or house to ensure that the lender doesn’t lose out on their money. If you miss your payment or default on the loan, lenders will collect on the collateral to recover the payment. These loans often have lower interest rates. 
  • Unsecured Personal Loans: because there is no collateral to back up the loan, the lender remains unprotected from defaults or non-payment, which results in higher interest charges. 

Personal loans are offered by a wide range of lenders, but taking one out can be more challenging if your credit is not so great. This may influence your decision between payday loans vs personal loans. 

Even still, don’t make any rash decisions— there are options available to get your credit back on track. 

Payday Loans vs Personal Loans: Credit Repair

If you take out payday loans vs personal loans, you’re much more likely to get yourself into a sticky financial situation. You don’t want to get stuck paying the ridiculously APR charges of a payday loan over and over again. 

You may want to pay down some of your debts using a personal loan, or you might even need to take out a personal loan after you rebuild your credit. If you’re worried about getting approved for a personal loan, a professional credit repair company can help you. 

Credit Analysis and Guidance 

When you use a professional credit repair company, they will analyze your credit report and give you in-depth information about what’s not looking so great. 

You can use credit tools like Experian or Identity IQ to check your report, but a professional credit repair company will help you to optimize your score and maximize your financial opportunities. 

Credincrease, for example, is an industry leader in credit repair and over 95% of customers see the first credit improvements in as little as 45 days or less. 

If you want to avoid having to deal with payday loans vs personal loans but need to boost your credit first, it’s advisable to work with a professional to speed things along and explore all potential solutions to your credit needs. 

Final Thoughts: Payday Loans vs Personal Loans 

It’s not recommended that you take out payday loans vs personal loans. Payday loans are notoriously dangerous for your financial health and can put you in a situation that is tough to get out of due to high interest charges. 

Personal loans are a much better option, and when you use your funds wisely, can actually help to expand your financial situation and create more overall health for your wallet. When it comes down to the payday loans vs personal loans debate, taking out a personal loan is the clear winner. 

Contact Credincrease today for a free, no obligation consultation to review your credit report to start you on your journey towards credit repair, lower interest rates, and higher approval odds. 

By Veronica

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By Veronica

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