Oct 15, 2024
Think all debt is equal? Payday loans and personal loans, for example, may each provide you with funds quickly. But they are different when it comes to loan flexibility, repayment terms, and potential fees.
Deciding whether a payday loan or a personal loan is right for you may depend on your financial situation. As you consider your options, be sure to weigh the benefits and drawbacks of each.
Here’s what you need to know about the differences between payday loans and personal loans.
A payday loan “is usually a short-term, high cost loan, generally for $500 or less, that is typically due on your next payday,” according to the Consumer Financial Protection Bureau (CFPB). Payday loans typically do not require a credit check. Instead, you’ll likely need a government-issued ID, a bank account in good standing, and proof of income such as a pay stub. Fees and penalties for late payments can be large.
A personal loan is a lump sum of money you borrow to pay for a variety of expenses, and then you repay those funds in one set regular monthly payment over a period of time. In addition to undergoing a credit check, you should be prepared to provide proof of identity and proof of address, as well as employment and income verification.
Payday loans: Payday loans are generally small, short-term loans, with loan amounts ranging from $100 to $500.1
Personal loans: The amount you can borrow with a personal loan varies by lender. At Discover® Personal Loans, personal loans range from $2,500 to $40,000.
Payday loans: These short-term loans often come with high fees or finance charges. Payday loan fees might range from $10 to $30 for every $100 borrowed for just a few weeks or less.1 That does not include any late fees you could be charged if you are unable to repay the loan on time.
Personal loans: Depending on your lender, personal loans can come with their own set of fees. Some lenders charge an origination fee that is deducted from your loan amount when you take out the loan. A 3% fee might not sound like much, especially compared with payday loans. But if you are charged 3% on a $10,000 loan, you will receive only $9,700 but will still need to pay back (and pay back interest on) the full $10,000. In addition, some lenders may charge a prepayment penalty if you pay off your loan before the repayment term ends.
The good news is that not all lenders charge origination fees. A Discover personal loan, for example, does not charge any origination fees or prepayment penalties. In fact, there are no fees at all as long as you pay on time.
Payday loans are designed for short-term use. These loans are typically due at the time of your next paycheck. Failing to repay the loan within that term could result in extra fees.
Payday loans: Perhaps the biggest potential downside of payday loans is their steep cost of borrowing. There are typically no traditional interest payments, but fees may be costly. For a two-week loan, for example, a $15 fee per $100 is equivalent to an annual percentage rate (APR) of nearly 400%. Plus, you could incur late fees if you fail to repay the loan on time. These fees add to your debt. You can see how easy it is to get caught up in a serious debt cycle.
Personal loans: Depending on your credit score, personal loans may offer relatively low interest rates. For borrowers with a good credit history, Discover Personal Loans offers a fixed interest rate from 7.99% to 24.99% APR. Depending on the lender, it’s a good idea to note any difference between the interest rate and the APR, which includes additional fees charged by the lender. Late fees might also apply, but budgeting may be easier with one set regular monthly payment.
Payday loans: Payday loans are designed for short-term use. These loans are typically due at the time of your next paycheck. Failing to repay the loan within that term could result in extra fees. If you are not ready to repay the loan, some payday lenders allow borrowers to roll over a loan for an additional fee.
Personal loans: Personal loans give you a flexible repayment schedule based on your financial situation. With many lenders you can choose from a range of repayment terms to fit your budget. At Discover Personal Loans you can choose how long you’d like to repay your loan—from 36 up to 84 months.For example, if you get approved for a $15,000 loan at 12.99% APR for a term of 72 months, you’ll pay just $301 per month.
If your cash flow is limited, you might prefer a loan with a longer repayment term, which would lower your monthly payment. Or you might choose a loan with a shorter time frame if you want to save money on interest. This could, however, result in higher monthly payments. Try our personal loan calculator to find the best repayment term for your budget.
Payday loans: A payday loan is unlikely to help you strengthen your credit history. Even if you repay it in full and on time, payday lenders typically don’t report your strong payment history to the credit bureaus. If you default, however, your loan can go to collections. That may be reported to credit bureaus, hurting your credit score.
Personal loans: A personal loan can help you build your credit history. On-time payments are reported to credit bureaus, which positively affects your credit. In addition, having diverse credit accounts in good standing shows that you can manage a credit mix responsibly, which is factored into your credit score.
Payday loans: Payday lenders may help borrowers in case of an emergency. These short-term loans do not typically require a credit check. They may be a financial stopgap for lower-income borrowers. But consumers who lack the means to pay back the loan may find themselves in a difficult cycle of unpaid loans and compounding fees.
It’s important to know the terms of the loan agreement. In some states payday lenders may allow you to extend the loan when it becomes due. Some lenders may let you repay the loan in installments over a longer period of time. Some states do not permit payday lending at all.
Personal loans: Long-term personal loans are designed as flexible solutions to your financial needs, such as debt consolidation. That’s why they are offered by some of the most recognizable brands in the industry, including Discover.
Loan agreements may differ between lenders, so be sure to read the fine print. If the lender includes origination fees or closing costs, it might be good to look at other options. With Discover Personal Loans you’ll pay $0 origination fees, $0 closing fees-no fees of any kind as long as you continue making payments on time.
Both personal loans and payday loans can be used for financial emergencies. But payday loans may lead to a damaging cycle that makes it difficult for borrowers to catch up because of expensive fees.
In contrast, personal loans can offer borrowers a long-term solution that may be easier to manage responsibly and may help build financial wellness. And it can be quick: with Discover Personal Loans, funds can be sent as soon as the next business day after your acceptance.
In fact, Discover Personal Loans gives same-day decisions in most cases. See if you qualify and get started.
Generally, consider payday loans as a last resort. You might want to try these alternatives first:
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The information provided herein is for informational purposes only and is not intended to be construed as professional advice. Nothing contained in this article shall give rise to, or be construed to give rise to, any obligation or liability whatsoever on the part of Discover Bank or its affiliates.
