App version: 0.1.0

What Are the Differences Between Payday Loans vs Personal Loans?

Payday Loans vs Personal Loans
Sulaiman Abdur-Rahman
Sulaiman Abdur-RahmanUpdated June 17, 2023
Share this article:
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%.How do payday loans differ from other types of loans? Payday loans typically come from nonbank lenders. 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 conventional 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.

How Personal Loans Work

Personal loans work like an installment loan: You borrow a lump sum of money from a lender and repay the loan over a set term, usually with interest. There are different uses of personal loans, such as making home renovations or consolidating debt.Lenders may offer personal loans ranging from $1,000 to $100K. Proof of identity and proof of income are some of the typical requirements for obtaining a personal loan.The APR on a conventional personal loan usually does not exceed 36%, and the repayment term is usually between 12 months and seven years, although some lenders may offer longer terms. There are different types of personal loans, and a payday loan is essentially a personal loan that may have a short repayment period and a high APR.

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.

Risk of Personal Loans

Borrowers who take out personal loans are expected to repay the loan. Borrowers who miss payments on a personal loan run the risk of defaulting on the debt. A personal loan default can damage your credit and make it harder to borrow additional funds in the future.

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

Getting a payday loan may not be right for you if you qualify for more affordable forms of financing. You may consider alternatives to payday loans, such as credit cards or personal lines of credit. 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:
Loan amounts can range from $1,000 to $100,000Can raise your burden of debt
Lenders may offer various types of personal loans that can be secured or unsecuredYour credit score could drop several points if lenders check your credit report with a hard inquiry
Subprime borrowers can get personal loans for bad creditAnnual interest rates could be as high as 35.99% for subprime borrowers
Borrowers with excellent credit may get low-interest APR less than 10%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 loansPersonal loans
Have short repayment terms measured in days or weeksMay have repayment terms ranging from 12 months to seven years
Don’t require good creditMay require excellent credit to qualify for large loan amounts up to $100,000
Lenders may not check your credit reportLenders may pull your credit report, which can negatively impact your credit score
Have high borrowing feesCan have origination fees ranging from 1% to 10% of the loan amount

Payday Loan vs Personal Loan: What’s 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. The way how payday loans work is you typically borrow a small sum of money — less than $1K — and repay it over a short term with fees that can amount to $10 to $30 for every $100 borrowedIf you need to borrow a large sum of money beyond $1,000, then you may explore personal loans as a possible finance option. How do payday loans differ from other types of loans? The APR on a payday loan is typically much higher than the APR on a conventional lending product.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.

The Takeaway

Choosing a payday loan vs. personal loan can have pros and cons. Payday loans may provide borrowers with a small sum of cash at a relatively high cost. Applying for online personal loans may give you the funds you need at a more affordable APR.Lantern by SoFi can help you explore personal loan offers. 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.Compare personal loan rates and apply in minutes.

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?
Do payday loans hurt your credit?
Photo credit: iStock/damircudic

About the Author

Sulaiman Abdur-Rahman

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 served 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.
Share this article: