Personal loan vs personal loan: which is the best option?

Our goal at Credible Operations, Inc., NMLS Number 1681276, hereafter referred to as “Credible”, is to give you the tools and confidence you need to improve your finances. Although we promote the products of our partner lenders who pay us for our services, all opinions are our own.

If you need emergency money, you might consider taking out a personal loan or a payday loan. But only one of these options is worth considering. (Shutterstock)

When you need quick access to cash, you have several loan options, including personal loans and payday loans.

Personal loans are installment loans with lower interest rates than other credit products, making them a suitable option for many borrowers. In contrast, payday loans are short term loan which usually come with high fees. As a general rule, you should avoid taking out a personal loan and only consider them as a last resort.

Here’s what you need to know about the difference between personal loans and payday loans, and why you should proceed with caution before signing up for a payday loan.

Personal loan vs personal loan: what is the difference?

Payday loans and personal loans are both unsecured loans that give you access to a lump sum of money after approval. But these loans are more different than alike. Here is a breakdown of the key differences between payday loans and personal loans:

  • Amounts borrowed — Payday loan amounts range from $50 to $1,000, depending on the laws of your state. Most payday loans are $500 or less, according to the Consumer Financial Protection Bureau (CFPB). In contrast, personal loans range from $100 to $100,000 with an average loan amount of around $8,000, according to the United States Chamber of Commerce.
  • Repayment Terms – Personal loan repayment terms typically range from 12 to 60 months (and sometimes longer). Payday loans, on the other hand, typically require you to repay your loan amount (plus fees) in one lump sum payment before your next payday.
  • Interest rate – The average interest rate for a 24-month personal loan in the first quarter of 2022 was 9.41%, according to Federal Reserve Data. Since personal loan interest rates are often lower than credit card interest rates, you can use them to consolidate multiple high-interest credit card balances into one lower monthly payment. Payday loans generally charge a percentage or dollar amount for every $100 you borrow. This fee is typically around $15, which effectively equates to an annual percentage rate (APR) of nearly 400% for a two-week loan, according to the CFPB.
  • Impact on credit — If you have a personal loan, your lender will likely report your monthly payments to major credit bureaus, which can improve your credit history if you make your payments on time. Unfortunately, payday loans won’t show up on your credit report unless your account becomes delinquent, which could negatively affect your credit score.

With Credible, you can view your prequalified personal loan rates from various lenders, all in one place. And it won’t affect your credit score.

Advantages and disadvantages of payday loans

As with most loans, payday loans have pros and cons to consider:


  • Easy to qualify — Since payday loans generally do not require a credit check, applicants with below average credit may qualify.
  • Quick Funding — It is not uncommon to receive payday loan fund within the same day or the next business day following your approval.

The inconvenients

  • High fees and interest rates — Loan fees for payday loans range from $10 to $30 for every $100 you borrow for two weeks.
  • Rollovers can lead to a cycle of indebtedness – In many states, payday lenders can offer you a rollover if you are unable to repay your loan by its due date. As such, you would only have to pay the loan fees while the lender extends the due date of your loan, resulting in more fees and more debt.

Alternatives to payday loans

You should avoid taking out a payday loan whenever possible. If you need money right away, you have other options, such as:

  • Personal loans
  • Credit card
  • Alternative payday loans (APP) offered by federal credit unions
  • Home Equity Loans, or HELOCs
  • Loans from friends or family

Personal loans are a cheaper alternative to payday loans. They usually come with lower interest rates and give you much longer to pay off your loan than payday loans.

If you need emergency money, personal loans from online lenders can take as little as a day to fund, and lenders can often approve your application within minutes.

Rather than taking out a personal loan, consider applying for a personal loan. Many online lenders allow you to prequalify without affecting your credit. If you don’t qualify for a personal loan, review your other options at this time.

How to Avoid Predatory Lenders

Due to their high interest rates and fees and short repayment terms, payday loans can be considered a form of predatory lending.

Here are some predatory lender red flags to watch out for:

  • Does not reveal APR or fees – The law requires lenders to disclose APRs and fees for their loans, but predatory lenders can make this information difficult to find.
  • Negative consumer reviews — Consult the opinions of the lenders on Better Business BureauFederal Trade Commissionand Trustpilot to see if a lender is reputable. If the vast majority of reviews you find are negative, you may want to avoid that lender.
  • No income or credit check — Personal lenders typically determine your likelihood of repaying a loan by conducting a credit check and asking you to submit documentation proving your income. If a lender does not verify your income or check your creditit could be a sign of predatory lending.
  • Encourages repeat lending — Predatory lenders can encourage borrowers to extend their loans or refinance them into a new loan, which can trap you in a cycle of debt.

Payday loans almost always come with significantly higher costs and risks than personal loans. With a lower interest rate, longer repayment term, and larger loan amounts, a personal loan is a better option than a payday loan if you need emergency cash.

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