What Are the Differences Between Payday Loans vs Personal Loans?

Q: Are payday loans bad?

Payday loans are bad if you cannot afford their high fees, but payday loans can be good if you need quick financing, have poor credit to qualify for alternative consumer lending products, and have the ability to repay the loan in full without any rollover loan extensions.

Q: Do payday loans check credit scores?

Alternative financial service providers who offer payday loans usually do not check a borrower’s credit score. These lenders may offer payday loans to any adult who has a bank account, proof of identity, and proof of income.

Q: Are payday loans fixed or variable interest?

Payday loans have a fixed fee structure. As mentioned earlier, lenders of payday loans may charge $10 to $30 for every $100 borrowed, which can amount to 261% to 782% interest charges when converting the fee into APR for payday loans with a 14-day repayment term.

Sulaiman Abdur-RahmanUpdated March 5, 2022

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

A payday loan is a short-term loan that provides up to $1,000 and charges high fees for every $100 borrowed. A personal loan, by comparison, may provide larger sums of money to be repaid over a longer period at lower rates of interest.Banks, credit unions, and nonbank financial institutions may offer personal loan amounts ranging from $1,000 to $100,000. Personal loans may also have repayment terms ranging from 12 months to seven years and annual percentage rate or APR interest charges never exceeding 36%.Alternative financial service providers may offer payday loans allowing you to borrow hundreds of dollars that must be repaid within 14 to 60 days along with a borrowing fee. A $100 payday loan with a $15 borrowing fee and 14-day repayment term equals 391% APR.The terms and conditions of a payday loan vs. personal loan are very different. Below we provide more information about these consumer lending products and highlight their typical terms and requirements.

What Is a Personal Loan?

A personal loan is a consumer lending product that provides you with a lump sum of money that can range from $1,000 to $100,000. Borrowers are expected to repay the loan over a fixed term, including the principal amount and any interest charges.Lenders may review a borrower’s credit history and debt-to-income ratio when deciding whether to approve a borrower’s personal loan request. Banks, credit unions, and nonbank financial institutions may offer personal loans with repayment terms ranging from 12 months to seven years.

Typical Personal Loan Requirements

Typical personal loan requirements call for borrowers to present proof of identity, proof of residence, and proof of income. Lenders may also require borrowers to have good credit and a debt-to-income ratio below 36% to qualify for large personal loans up to $100,000.

Typical Personal Loan Terms

As mentioned earlier, typical personal loan repayment terms can range from 12 months to seven years. Borrowers typically make monthly payments on the loan and must fully repay the principal loan amount and any interest charges by the end of the term.

What Is a Payday Loan?

As stated earlier, a payday loan is a short-term consumer lending product that charges high fees for every $100 borrowed. Lenders of payday loans generally offer small sums of cash not exceeding $1,000.Payday loans are one of the cash advance types of lending offered by alternative financial service providers. These lenders may charge $10 to $30 for every $100 borrowed, which can amount to 261% to 782% interest charges when converting the fee into APR for payday loans with a 14-day repayment term.Consumers can get payday loans by having a bank account, proof of identity, and proof of income. Good credit is not required to get a payday loan. On a basic level, payday loans are short-term personal loans with no credit check.

How Payday Loans Work

Here is a breakdown covering how payday loans work in terms of their typical requirements and repayment terms:

Typical Payday Loan Requirements

As stated earlier, you may need a bank account, proof of identity, and proof of income to get a payday loan. You can repay the loan in full by writing a postdated check, authorizing the lender to debit the money from your bank account, or paying with cash on the due date.

Typical Payday Loan Terms

A typical payday loan has a 14-day term of repayment. Some payday lenders may offer repayment terms up to 60 days. If borrowers cannot afford to repay the loan in full when the term ends, borrowers could accept a rollover extension that extends the repayment term and charges additional fees.Recommended: Comparing a Payday Loan vs Installment Loan

Risks of Payday Loans

One of the risks of payday loans is they can fuel a cycle of debt. Failing to repay the loan in full by the end of its short term can lead to a borrower rollover. The rollover gives you more time to repay the loan while saddling you with more fees.Taking out a $300 payday loan with a 14-day term of repayment and $45 borrowing fee, for example, would require you to pay $345 within 14 days. If you cannot afford the payment, the lender may ask you to pay $45 immediately and $345 due two weeks later under the rollover extension.Another risk of payday loans is lenders may attempt to garnish your wages if you default on the payday loan. The lender may take legal action seeking a court order to force your employer to withhold some of your earnings to satisfy your debt.At least 18 states plus the District of Columbia ban short-term payday loans or limit their APR interest to 36% or less, according to the Center for Responsible Lending.A 2006 federal law, the Military Lending Act, bans creditors from giving members of the U.S. armed forces high-interest loans charging more than 36% APR.

Pros and Cons of Personal Loans

Here are some pros and cons of personal loans:

Pros	Cons
Loan amounts can range from $1,000 to $100,000	Can raise your burden of debt
Lenders may offer various types of personal loans that can be secured or unsecured	Your credit score could drop several points if lenders check your credit report
Subprime borrowers can get personal loans for bad credit	Annual interest rates could be as high as 35.99% for subprime borrowers
Borrowers with excellent credit may get low-interest APR less than 6%	Defaulting on the loan may cause your credit score to plunge drastically

Payday Loans vs Personal Loans

Let’s compare payday loans vs. personal loans:

Payday loans	Personal loans
Have short repayment terms measured in days or weeks	May have repayment terms ranging from 12 months to seven years
Don’t require good credit	May require excellent credit to qualify for large loan amounts up to $100,000
Lenders may not check your credit report	Lenders may pull your credit report, which can negatively impact your credit score
Have high borrowing fees	Can have origination fees ranging from 1% to 10% of the loan amount

Weighing Which Is Right for You

You can evaluate the borrowing terms of a payday loan vs. personal loan to determine whether any of these consumer lending products are right for you. If you need to borrow a large sum of money beyond $1,000, then you may explore personal loans as a possible finance option. If you need a small sum of quick cash, you may consider taking out a payday loan.Borrowers bear the burden of making debt payments. This is true whether you are exploring personal loans for single mothers or payday loans for unexpected emergencies. You can consider the overall costs of borrowing money and review your creditworthiness when weighing whether to take out a payday loan, personal loan, or some other type of financing.

Other Alternatives to Payday Loans

Here are some alternatives to payday loans:

Credit Cards

Consumers can use credit cards as an alternative to payday loans. Cardholders may withdraw money from an ATM through a cash advance. Credit cards can also allow you to make emergency purchases on credit when short on cash.

Car Title Loans

Car owners may consider a car title loan as an alternative to payday loans. A car title loan is a collateralized loan secured by your vehicle. This loan works by allowing car owners to borrow against some of the equity in their cars.

Personal Lines of Credit

Borrowers may use personal lines of credit as an alternative to payday loans. Personal lines of credit allow borrowers to withdraw funds from the credit line up to a set limit for personal spending.

Cosigned Personal Loans

Cosigned personal loans can serve as an alternative to payday loans. Cosigners with good credit scores can help people with poor credit histories get approved for personal loans. Borrowers and cosigners share the financial responsibility of repaying the loan in full.

Compare Personal Loan Rates Today

Lenders may offer personal loans to subprime borrowers with credit scores under 600, and Lantern by SoFi can help you explore personal loan rates today.Just provide basic information about yourself and the loan you need, and Lantern can guide you in the process to apply for a personal loan with the lender of your choice.

Frequently Asked Questions

Are payday loans bad?

Are payday loans more expensive than personal loans?

Do payday loans check credit scores?

Are payday loans fixed or variable interest?

SoFi Loan Products SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC), and by SoFi Lending Corp. NMLS # 1121636, a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law (License # 6054612) and by other states. For additional product-specific legal and licensing information, see SoFi.com/legal.

Photo credit: iStock/damircudic

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About the Author

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman writes about personal loans, auto loans, student loans, and other personal finance topics for Lantern. He’s the recipient of more than 10 journalism awards and currently serves as a New Jersey Society of Professional Journalists board member. An alumnus of the Philadelphia-based Temple University, Abdur-Rahman is a strong advocate of the First Amendment and freedom of speech.

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