Differences between a Personal Loan and Payday Loan

So your brakes went out on you while you were driving, and you managed to get it to a mechanic, but the bill made your heart skip a beat. Or maybe you see an opportunity to develop some passive income, but you don’t quite have the amount needed to get your project up and running. Whatever the reason, sometimes you just need more money. There are a lot of loan options on the market today, making it difficult to decide which one is best for you. Let’s narrow it down and learn the difference between personal loans and payday loans so you can determine which one best suits your financial needs.

Personal Loans

A personal loan is what you typically think about when hear the word loan. It comes from a bank or a credit union, and they check your credit score when you apply. You are either approved or declined, and, if they approve you, the interest you pay is based off of your credit score. The higher your credit score, the lower the interest; the lower your credit score, the higher your interest.

Payday Loans

Payday loans are different from personal loans in that before getting approved, the lender goes through a specialty bureau, which does not affect your credit score. As a consequence, when you repay the loan, it will not help your credit score. However, if you default— meaning you don’t make a payment— your loan will be sold to a collection agency and your score will lower.

What you need to know

Personal Loans

  • Applying for a personal loan will negatively impact your credit score because the lender is going to request a credit report. There’s no way around this. Any time someone checks your credit score, it lowers.
  • If you are unable to pay on your loan a certain month, the credit bureaus are notified immediately, which again negatively impacts your credit.

Payday Loans

  • The interest rate is higher, typically charged as a $15 fee for every $100 borrowed
  • Shorter repayment period with usually a two week turnaround

Who should apply for a personal loan?

Personal loans are best for people who have a good credit score and are able to repay the debt without any issues. If your finances are on rocky terrain, a personal loan is not going to be your saving grace. However, if you are financially sound, but need the money for an investment opportunity, then a personal loan is probably right for you. Any negative impacts that occur from the application process will be quickly remedied with punctual payments.

1 Comment

  1. James Bergman
    April 5, 2016 at 5:45 pm

    I agree that if you have good credit you should probably just apply for a regular loan, depending on what you need it for. Payday loans are more for those who need to fix their car because they need to get to work, but can’t afford repairs. In essence a quick loan without the red tape. I think it is a decent option if you need it, as long as you are able to pay it off quickly.

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Kristine Wood

Kristine Wood

Our Writer

Kristine is a writer, specializing in finance, and has over 7 years of writing experience. She enjoys to stay up to date and always have the latest information about the current financial market, specifically personal loans.

Kristine studied Economics at the University of Pennsylvania.

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