When it comes to borrowing money, there are two main options: payday loans and personal loans. While both can provide you with the funds you need, there are some key differences between the two. The main difference between a payday loan and a personal loan is the basic terms. A payday loan is a very short-term loan that is usually due within one month, while the term of a personal loan is at least two years.
Payday loans are almost always more expensive than personal loans when it comes to borrowing money, and they're also riskier. If you qualify for a personal loan, choosing this option will allow you to borrow more money, give you more time to repay it, and charge you a lower interest rate. Payday loans are also known as cash advance loans or check advance loans. They provide immediate funding, have extremely high interest rates, and are usually based on your income, not your credit history.
To qualify for a payday loan, you usually need an active bank account, ID, and proof of income, such as a paystub. Essentially, lenders make payday loans in small amounts, which borrowers are expected to pay with their next paycheck along with a fee. Payday lenders often base the principal of their loan on a percentage of the borrower's expected short-term income. Personal loan rates can vary considerably, but typically range from 10 to 28%, depending on your financial credentials.
In some cases, it is possible to get a much better rate than that. Personal loans are always a better option than payday loans, as they have lower interest rates and the loan decision is based on your ability to repay. If you are considering a payday loan, you may first want to take a look at safer personal loan alternatives. Because of the high interest rate, many people end up owing more than they originally borrowed and don't pay the payday loan. Check NerdWallet's database of local alternatives to payday loans to see what's available in your state. Those protections include a 36 percent cap on the Military Annual Percentage Rate (MAPR), as well as other limitations on what lenders can charge for payday and other consumer loans. In conclusion, if you need emergency money, you should first apply for a personal loan.
Payday loans are significantly more expensive than personal loans under virtually all circumstances and should only be used if you are absolutely sure you can return it.
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