Payday Loans vs. Personal Loans: What You Need to Know

Payday Loans vs. Personal Loans: What You Need to Know

If you’re short on funds, you may be considering a payday loan.  These loans offer fast cash, often with no credit history check.  But with high fees, payday loans can be more costly in the long run.  In many cases, a personal loan is a far better option for most borrowers.

How Payday Loans Work

A payday loan works like an advance on your next paycheck.  In order to get one, you must be at least 18 years old and have both a bank account and a job with a steady income.  Most payday lenders do not check your credit history, and instead charge high fees for each $100 borrowed, ranging from $10 to $30.  On a $500 payday loan, fees would likely range from $50 to $150.  Once approved, the lender will ask for a postdated check for the amount of the loan and fees, which will be deposited once you receive your next paycheck.  If you do not pay off the loan completely, additional fees and finance charges will apply.

While payday loans are convenient, and offer fast cash to consumers, they are a very expensive way to borrow money. According to the Federal Trade Commission, the annual percentage rate charged by these loans can be as high as 390%.  The high fees charged by payday loan lenders also increase the likelihood of a borrower falling further into debt, as their next paycheck is eaten up by repaying the loan and fees and they find themselves short on cash once again.  Consumers often renew payday loans so many times that they end up owing far more in fees than what they originally borrowed. Because of this, many states prohibit payday loans through outright bans or with laws capping fees for small loans.

How Personal Loans Work

In contrast, personal loans typically have a lower, fixed interest rate and a defined repayment term of anywhere from two to five years.  Lenders check your credit history, and approve your loan based on your credit report, income and other factors such as whether you have collateral for a secured loan.  Personal loans can also be taken out for much greater amounts than payday loans. This means that personal loans can actually offer a better solution to many immediate financial problems, like paying off overdue bills in full. Because borrowers repay the loan with a fixed monthly payment over a longer period of time, the likelihood of falling into the debt cycle is much lower than with payday loans.

Given the astronomical interest rates and fees, you should avoid payday loans unless they are absolutely necessary.  Instead, consider a personal loan, which offers substantially lower interest rates and a fixed repayment term.  Personal loans can help get your finances on track, rather than sinking you further into debt.  Apply online today, and find out if you qualify for a personal loan from Patriot Finance.