Comparing payday loans vs. personal loans for fast cash

When you need money immediately, payday and personal loans can give you quick cash access. People often use them for financial emergencies like medical bills or unexpected car repairs. These loan options have the same primary purpose of giving you fast access to funds, but their similarities largely end there.

Let’s take a closer look at the key differences between payday loans and personal loans so you can decide which financing option is the best for you.

Payday loans vs. personal loans: How are they different?

Payday loans and personal loans have major differences in how they work and what they cost.

Payday loans give you quick cash in small amounts with few requirements. But they charge very high interest rates, and you must repay them on a short timeline - typically, within 2 weeks. Personal loans offer more money, lower rates, and let you pay back over months or years.

The biggest challenge with payday loans is their short repayment period. Many borrowers struggle to repay the full amount plus interest by their next paycheck. This often forces people to take out a new loan to cover the old one, creating a debt trap.

Personal loans offer a longer term, although terms can vary by lender. Many personal loans offer a term of 36 to 60 months (or 3 to 5 years). Payments are made monthly, and they remain fixed. Rocket Loans℠ offers loan terms of 36 – 60 months.

Interest rates: personal loans vs. payday loans

Payday loans carry extremely high interest rates, often reaching 400% APR or higher. Personal loans come with much lower rates, usually between 8.01% and 29.99% APR. This is one of the reasons why payday loans are available to almost anyone, and personal loans have more requirements.

It’s also important to know that payday loans are illegal in some states because they tend to create debt cycles. Even states where payday loans are legal sometimes have caps on how much money you can borrow and the fees that the lender can charge.

How are payday loans and personal loans similar?

Although payday loans and personal loans are different in many ways, they do have a few similarities. Both allow you to access the funds you need quickly. Some consider both types of loans as unsecured loans, meaning you don’t need to offer any type of collateral. However, this similarity is debatable. Payday loans use your paycheck as a form of collateral. You borrow funds against your paycheck. Still, the lender cannot repossess any item of value with these loans. If you fall behind on payments or stop paying, both loans will report this to the credit bureaus and result in a hit on your credit report and your score. If you default on your personal loan, you can cause damage to your credit and impact your ability to borrow in the future.

Both payday loans and personal loans allow you to use the funds from the loans for various needs; the restrictions for the loans are minimal.

While both loans offer fast approval and cash, personal loans can take a little longer to disburse (typically 1 – 7 business days). However, Rocket Loans customers may be eligible for same-day funding if approved.

How payday loans work

A payday loan is only designed to get you by for a short period until you can repay the loan on your next paycheck. Payday loans only allow you to borrow a relatively small amount of money. Borrowers who need a loan with higher lending limits may need to explore other options or loan products.

Payday loans are marketed to individuals with bad credit and individuals who don’t have access to other financial options. Qualifying for a payday loan is fairly simple: You need to fill out an application online or through a payday lender and provide the lender with a signed check or permission to withdraw the funds from your bank account on the day the loan is due.

For your application to be approved, you must be 18 years or older, have a bank account and a valid ID, and be able to provide proof of employment. If you’re considering a payday loan, check your local state regulations since this type of loan is not legal in all states.

Payday loan cons

Unfortunately, payday loans come with more negatives than positives. Here’s a look at the drawbacks.

Payday loans have shorter repayment periods. With a shorter repayment period than a personal loan, a payday loan can make it difficult to come up with the money in time to pay the loan back in full. This makes it easy to fall into a debt cycle with a payday loan. One of the biggest downfalls of payday loans is the cycle of debt the loans may trigger. If a borrower can’t repay their loan by the end of the term, they often have no other choice but to roll the loan, interest, and fees over into a new loan. This new loan incurs a new set of fees, creating a cycle of payday loan debt that can be hard to escape.

Payday loans have higher interest rates. With an interest rate of around 400% or even higher, these loans perpetuate a dangerous debt spiral.

However, there are a few pros in favor of these loans. They are very easy to secure, and they are accessible to individuals with poor credit scores.

How personal loans work

Personal loans are more widely available than payday loans and are available from most banks, credit unions, and online financial lenders. Personal loans also have better loan terms and offer lower interest rates than payday loans and even credit cards; the monthly affordability of these loans makes them a more popular choice for individuals who need financial assistance. While interest rates vary from lender to lender and also with your credit score, 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, including making larger purchases, debt consolidation, and 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 a set budget.

Personal loan pros

Personal loans offer more borrower benefits than payday loans.

Personal loans have higher lending limits. These loans have significantly higher lending limits than payday loans. With Rocket Loans, you can borrow $2,000 to $45,000.

You have longer to pay a personal loan back. Unlike payday loans, which have very short terms, personal loans can be paid back with fixed monthly payments over the course of a few years.

Personal loans can help your credit score. If you take out a personal loan and continue making your payments on time, your credit score may increase with timely payments. However, paying off a payday loan will generally have no impact on your credit score.

Personal loan cons

The bottom line: Should you get 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 a payday loan’s ease of accessibility may sound enticing, this loan may end up costing you significantly more in interest and fees than you originally thought. You also may end up in a dangerous and expensive debt spiral.

Most people choose to use a payday loan when they believe they have no other options. It’s important, however, to ask yourself whether you’ll be able to repay this loan on time. If you’re not confident in your ability to do so, consider talking with a financial adviser 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.