What to know before borrowing
- Payday loans usually come with very high interest rates and are often based on your income.
- Personal loans are long-term installment loans that generally have lower rates than payday loans.
- Payday loans are always a worse option than personal loans due to their high rates.
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Taking out a loan can be a useful way to pay for expenses that you might not otherwise be able to cover at the moment. You may want to borrow to cover medical bills, home renovations, or maybe even a vacation.
The most common forms of loans for quick cash are payday loans and personal loans, although one is a much better option than the other.
payday loan vs. Personal loan: In one look
- A payday loan is a short-term, high-cost unsecured loan with principal as part of your next paycheque.
- A personal loan is an unsecured long-term loan with higher minimum loan amounts and lower interest rates.
- You can use either money pretty much however you like; other than that, they have few similarities.
Stefanie O’Connell Rodriguez, host of Real Simple’s Money Confidential podcast and personal finance expert at Discover, recommends avoiding payday loans whenever possible.
“It’s an option of last resort, like avoiding it at all costs,” says O’Connell Rodriguez. “If you’re considering something like, ‘OK, do I use a payday loan or a credit card or a personal loan,’ understanding that a payday loan is the option of last resort might help make that decision a little easier.”
What is a payday loan?
Payday loans are often for small amounts of money, usually $500 or less. They are designed for borrowers who are in need – perhaps you need money to cover an unexpected medical bill or a damaged item. Payday loans provide immediate funds, come with extremely high interest rates, and are generally based on your income, not your credit history.
“Payday loans come at a price,” says Kendall Clayborne, Certified Financial Planner at SoFi. “They can have interest rates over 600%. Such high interest rates, not to mention the other associated fees, can quickly lead to situations where you end up falling behind on the loan and have to borrow money. more and more to pay it comes back.”
Payday loans are never a better option than personal loans. They come with extremely high interest rates and are often predatory in nature.
“If someone asked me personally, I wouldn’t recommend a payday loan under any circumstances,” says Annie Yang, strategic financial advisor at Real Estate Bees.
You can get a payday loan by going to a physical lender or through an online lender. When you take out a payday loan, you often agree to authorize the lender to withdraw funds from your bank after your check has been deposited. The lender may request a signed check in order to receive the funds shortly after your next paycheck.
what is a Personal loan?
With a personal loan, you ask to withdraw a specific amount of money. The lender will show you available offers based on financial factors such as your credit score, debt-to-equity ratio, and ability to repay the loan. You can use a personal loan for a variety of reasons, including home renovations, medical bills, and vacations.
“Personal loans come with a credit check to qualify, but will give you a longer term to pay them back,” says Clayborne. “Your repayment schedule can be less stressful, giving you the flexibility to pay over a few years rather than a few months. With a longer repayment term, your personal loan can be easier to manage than a payday loan. .”
Personal loans are always a better option than payday loans because they come with lower interest rates and the loan decision is based on your ability to repay.
Online lenders, banks and
will give you money which you will repay over a fixed period, say a year or five years. Personal loans are almost always unsecured, meaning they don’t require collateral – like a house or car in the case of a mortgage or car loan – to be received. Most personal loans have fixed interest rates that remain the same for the life of the loan.
Whether you decide to take out a loan or not, O’Connell Rodriguez advised you not to judge yourself too harshly based on your financial situation.
“Have compassion for yourself,” O’Connell Rodriguez said. “Understand that where you are, if you are in an emergency, if you are in debt, if you are in a very bad financial situation, it says nothing about who you are, it says nothing about what you are capable of. of, or who you are. It doesn’t define your goodness or your dignity.”