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Payday Loans Vs. Personal Loans: Which Is The Better Option?

Hanna Kielar5-Minute Read
December 20, 2021

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When you need fast funding, there are a number of loan options that you can choose from. Two of those options are payday loans and personal loans.

While both options can provide you with the money you need within a short period of time, there are several considerations you should think about before choosing. Let’s take a look at payday loans versus personal loans to see how they’re different and which one is better for you.

The Difference Between Payday Loans And Personal Loans

Before you can determine which loan may be the better option for you, it’s important to understand the main differences between payday loans and personal loans.

  • Payday loans: These short-term loans are lent in small amounts, typically up to $500, and they typically come with higher interest rates. The agreement is that the borrower will repay the loan (with a fee) in full by their next paycheck. Typically, the entire lifecycle of the loan is 2 weeks.
  • Personal loans: These loans are typically larger, lump-sum loans that are repaid in monthly payments with a fixed interest rate. Personal loans usually have a longer loan term of 36 – 60 months.

 

Payday Loans

Personal Loans

Loan Amount

Up to $500

$2,000 – $45,000 (with Rocket LoansSM)

Loan Term

Typically 2 weeks

36- or 60-month repayment terms (with Rocket Loans)

APR

Around 400%

6 – 36%

Credit Score

No credit check required

600 – 700

Fees

$10 – $30 per $100 borrowed

Origination fee of 1 – 6% of the total loan amount (with Rocket Loans)

How Are They Similar?

Although payday loans and personal loans are different in many ways, there are a few similarities between them. Both of these options are typically unsecured loans, which means that you do not need to offer any type of collateral. With an unsecured loan, the bank cannot repossess anything from you if you default on your loan. However, defaulting on a personal loan can cause damage to your credit and impact your ability to borrow in the future.

Payday loans and personal loans alike offer you fast funding with little to no restrictions on what the money can be used for. This means that you can receive your funds shortly after applying, likely within the same day.

Apply For A Personal Loan.

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How Payday Loans Work

Payday loans, also known as cash advances, are only meant to get you by for a short period until you can repay the loan on your next paycheck. Because you can only borrow a small amount of money, many borrowers in need of higher lending limits find that a payday loan may not be right for their situation.

Payday loans are designed to target individuals with bad credit and those who don’t have access to other financial options. Qualifying for a payday loan is fairly simple. You’ll need to fill out an application through a payday lender or online, and provide the lender with either a signed check or for permission to withdraw the funds from your bank account. In order for your application to be approved, you’ll need to be 18 years or older with a bank account, have a valid ID and be able to provide proof of employment. If you’re considering a payday loan, you should first check your local state regulations as this type of loan is not legal in all states. 

Payday Loan Pros And Cons

  • Pro: Payday loans have fewer requirements. With minimal guidelines and no credit check required to qualify for a payday loan, there is greater accessibility to funding for individuals with lower credit scores.
  • Con: Payday loans have shorter repayment periods. With a shorter repayment period than what a personal loan offers, it can be difficult to come up with the money in time to pay the loan back in full.
  • Con: It’s easy to fall into a debt cycle with a payday loan. One of the biggest downfalls of payday loans is the cycle of debt that many borrowers often fall into after taking out a payday loan. If a borrower can’t repay their loan by the end of the term, there’s often no other choice for them but to roll the loan, interest and fees over into a new loan. This new loan also incurs a new set of fees, which is what helps create a cycle of debt that can be hard to escape from.
  • Con: Payday loans have higher interest rates. Unlike personal loans, payday loans carry substantial interest rates. Especially if a borrower is forced to roll their loan into a new one. In this case, they may be faced with an interest rate around 400% or possibly higher.

How Personal Loans Work

Because personal loans have better loan terms and lower interest rates than other options like payday loans or credit cards, they are often the more popular choice for financial assistance. Interest rates will vary depending on your lender and credit score, but you may be able to obtain a decent interest rate with a higher lending limit than you would with a payday loan.

Personal loans can be used for many purposes, such as making larger purchases, consolidating debt or financing home improvement projects. Since personal loans can be paid off in monthly installments, this type of repayment structure is helpful for borrowers who like having a set budget.

Personal Loan Pros And Cons

  • Pro: Personal loans have higher lending limits. These loans, which are commonly used to fund large purchases, make home improvements or pay down debt, have significantly higher lending limits than payday loans. With Rocket Loans you can borrow $2,000 – $45,000.
  • Pro: You have longer to pay a personal loan back. Unlike payday loans, which have very short terms, personal loan terms can be paid back with fixed monthly payments over the course of a few years.
  • Pro: Personal loans can help your credit score. If you take out a personal loan and continue making your payments on time, your score will likely increase. However, payday loans do not show up on your credit report and have no impact, even when you pay it off.
  • Con: Personal loans have more requirements. In order to be approved for a personal loan, you’ll need to meet stricter qualifications than you would with a payday loan. These requirements include a strong credit score and a low debt-to-income ratio – both of which payday lenders do not need to require.

Final Thoughts: Should You Choose A Payday Loan Or A Personal Loan?

When choosing between a payday loan and a personal loan, your better option will almost always be a personal loan. Though the ease of accessibility of a payday loan may sound enticing, these loans may end up costing you significantly more in interest and fees than you originally thought.

Most individuals choose to use a payday loan when they feel that their options have run out. It’s important, however, to ask yourself whether or not you will actually be able to afford to repay this loan on time. If you’re not confident in your ability to do so, you should consider talking to a financial advisor who can help you understand your options and how you can qualify for a personal loan.

Ready to get the process started? Apply for a personal loan today.

Apply For A Personal Loan.

Explore your options today and see what's possible in one simple click.

Apply For A Personal Loan.

Explore your options today and see what's possible in one simple click.

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Hanna Kielar

Hanna Kielar is a Section Editor for Rocket Auto℠, RocketHQ℠, and Rocket Loans® with a focus on personal finance, automotive, and personal loans. She has a B.A. in Professional Writing from Michigan State University.