What is the Difference Between Payday Loans and Personal Loans?
Many people think that payday loans and personal loans are the same thing, or at least very similar. But there are some big differences between the two.
Payday loans are generally very short term and are secured against your next paycheck. Payday lenders are usually very eager to offer this “band-aid” solution to your financial crisis, which comes along with their sky-high interest rates that are generally through the roof.
Personal loans are commonly for larger dollar amounts, which means that they can actually offer a solution to many of your immediate financial problems, and are paid back in installments over a longer period of time. Reputable lenders like LoanNow offer personal loans to help you start a journey toward financial recovery, rather than set you on an endless spiral of more debt and despair.
Aside from these main differences between payday loans and personal loans, there are many others which set the two options apart.
Loan Processing Period
Payday loans are typically processed quickly, while most personal loans may require several days or even a couple of weeks to process. Because payday loans are often approved within minutes and the loans disbursed the next business day, they may seem to have the upper hand for borrowers facing an urgent situation. If you are facing the prospect of having your electricity or phone service suspended tomorrow, waiting a week for a personal loan to be processed is not a desirable option.
But there are a few personal loan options that stand out above the rest when it comes to the time it takes to process your loan application. LoanNow can oftentimes deposit your funds into your account within minutes.* No more waiting until the next day – when you need money, you need it as fast as possible.
Repayment Period
Personal loans carry repayment periods ranging from several months to a year or even two years. By contrast, the repayment period for payday loans can be as short as one week, although many payday loans have repayment periods lasting closer to two weeks. Payday loans typically allow borrowers who cannot repay their loans in full to “renew” their loans at the end of each pay period by making a token payment that only covers a portion of the interest on the loan. Such renewals extend the loan so that a two-week loan can end up taking several months or more than a year to be repaid in full. According to a research report from the CFPB, the average borrower gets stuck in this cycle for 5 months!
Interest Rates and APR
Cash advances from credit cards carry high interest rates, but not nearly as high as the interest rates and annual percentage rate (APR) from payday loans. The average payday loan APR is 339% according to the CFPB, and they often exceed 1000%. In the best of both worlds, some credit unions and personal lenders such as LoanNow offer personal loans that are processed as fast as payday loans, but with much lower rates.
Credit Check
Many of the lending options you will find today usually require, at some point in their process, a credit check to see how your overall credit history looks and what your credit score is. This information is usually obtained from one of the three major credit bureaus.
Personal loans often require stringent credit checks, although some lenders like LoanNow consider other factors in addition to the information they receive from credit checks.
For many people with very poor credit, no cosigners and no collateral, payday lenders represent one of the few borrowing options remaining, mostly because these lenders usually do not perform a conventional credit check. Instead, borrowers are approved or denied for the most part, based on whether or not they have verified income.
Just as they do not usually perform a credit check before offering you a loan, payday lenders are also not required by law to report any information back to the credit bureaus about any loan you receive. This usually ends up working against you, because if you receive a loan, make timely and sufficient payments on that loan, and ultimately successfully pay it off, then that good behavior could help to improve your credit score. But since payday lenders do not report this good behavior, it does absolutely nothing to help improve your overall credit rating.
They may however, be quick to report any negative information if you end up defaulting on the loan, which will only hurt your credit score more. When it comes to trying to repair your credit, payday loans do absolutely nothing to help you improve your credit profile, and may actually end up hurting your score even more if you are unable to repay.
But LoanNow wants to help you start on that path towards rebuilding your credit and finding a more secure financial future. As soon as you are approved for a loan from us, you can start to build your LoanNow credit score, which can help you qualify for better rates or terms in the future, as well as help you get your overall credit profile back on the right track. We realize that the only way you will ever be able to get out of your financial crisis, is by starting to rebuild your credit today, and we want to help!
Collateral or Co-Signer Required
Personal loans typically do not request collateral, although some banks and credit unions may require borrowers with poor credit to obtain a creditworthy co-signer. Payday loans do not require co-signers, although some payday lenders may require borrowers to list references along with their employment and bank information. Title lenders are a type of payday lender that provides loans in exchange for the title of the borrower’s house or car. The borrower is still allowed to keep their house or car, but the lender keeps the title until the loan is paid in full.
The Final Tally
Sometimes we may find ourselves in an immediate cash crisis and don’t always have many options to get us through it. If you do not have the option of putting your house on the line by taking a home equity loan or using your car as collateral for a title loan, rest assured – there are still options.
Payday loans have two major advantages over other types of loans: processing speed and relaxed underwriting standards. But they also carry serious disadvantages that more than make up for the convenience of obtaining money quickly with no credit check. In fact, payday loans are often little more than financial traps that destroy a borrower’s credit for months, if not years.
But LoanNow is actually a far superior choice any way you look at it. We offer you the money you need without any waiting, and give you plenty of time to pay the loan back. We believe in making a difference in your financial situation that will help put you on a path to rebuilding your credit, rather than setting you up for future problems.
* Not everyone qualifies for instant funding. Individuals must have a supported debit card and one’s bank may impact availability of funds. This could occur in as little as minutes but could take up to several hours. Also subject to underwriting approval.
