Both payday loans and personal loans can be a source of much-needed cash, but they have distinct differences that could potentially help or hurt your finances. Below, we’ll compare both loan types, breaking down the risks and fees associated with payday loans and highlighting what makes personal loans — or another funding source entirely — the better option.
Compare personal loan rates
Payday loans vs. personal loans
Though personal loans and payday loans share some similarities — quick access to cash for broad use cases — it’s their differences that matter most. In almost every scenario, you should prioritize a personal loan over a payday loan. Comparing the two side by side can help you understand why.
Tip
Though borrowers with good credit are likely to get the best personal loan rates, even borrowers with bad credit might qualify. Some lenders offer loans to borrowers with credit scores below 580.
Impact on credit
- Payday loans typically don’t require a credit check, which makes them easier to qualify for. It also means no temporary drop in your credit score from a hard inquiry. However, payday loan lenders usually don’t report payments to credit bureaus, so you also can’t improve your score by responsibly paying back what you borrow. On the other hand, failing to repay a payday loan can damage your credit if the debt goes into collections and is reported to a credit reporting company.
- Personal loans typically involve a hard credit check when you apply, which can temporarily lower your credit score. Lenders usually report on-time personal loan payments to one or more credit bureaus, so repaying a loan could boost your credit score over time. Unfortunately, defaulting on a personal loan can also damage your credit. Payment history accounts for 35% of your FICO score, which means that a good record or bad record on repayment could significantly influence your overall score positively or negatively.
APR ranges
Payday loans
Payday loans don’t charge a traditional interest rate, but that doesn’t mean borrowing is free — far from it. Instead, payday loan fees are often $10 to $30 per $100 borrowed. That might not sound like much, but it’s actually quite high, especially if you find yourself needing to borrow repeatedly.
“While the numbers might not look terrible over a two-week period, things change fast if you can’t pay it off in full,” says R.J. Weiss, certified financial planner and founder of The Ways to Wealth. “The loan compounds, or even worse, you end up taking out another payday loan just to cover the first one.”
Over a typical two-week repayment period, a fee of $10 to $30 per $100 borrowed equates to an APR equivalent of 400%. The Center for Responsible Lending (CRL) has found instances of APRs up to 662% on payday loans.
Other payday loan fees to consider are:
- Repayment plan fees (for extended repayment plans, where allowed)
- Late fees
- Renewal or rollover fees (when you can’t afford to repay by the due date)
Editor insight: “It's the combination of fees and short repayment periods that make payday loans such an expensive way to borrow. You can use a payday loan calculator to see how the costs typically equate to paying triple-digit APRs. For example, a $500 payday loan with a $30 finance charge and a two-week repayment period would equal paying over 156% APR. A payday loan can be convenient, especially if you have bad credit, but that convenience comes at a cost.”
— Barry Bridges, Personal Loans Editor, Credible
Personal loans
Personal loan rates can be much more manageable, by comparison. While lenders typically charge APRs up to 36%, borrowers who were approved with fair credit received rates of 29.73%, on average; average rates were slightly higher for borrowers with bad credit at 31.42%. Average personal loan interest rates were based on 12 months of data from the Credible personal loan marketplace.
Many personal loan lenders charge origination fees, which are often deducted upfront from the loan proceeds. They’re accounted for in the loan’s APR and expressed as a percentage of the total loan amount (from 0% to 15%, depending on the lender). For instance, if you borrow $10,000 with a 5% origination fee, you would receive $9,500 but have to repay the full $10,000, with interest. On the other hand, some banks, credit unions, and online lenders don't charge personal loan origination fees.
Other personal loan fees to consider include late payment fees.
Loan repayment terms
- Payday loans are very short-term loans. Usually, payment is due in full by your next payday (or the next time another source of income, such as Social Security benefits, is deposited into your bank account).
- Personal loans have longer repayment terms. Though personal loan repayment terms vary by lender, most offer terms lasting from 2 to 7 years. In the case of larger loans or loans for a specific purpose, such as home improvement, a few lenders offer repayment terms of 10 or more.
Loan amounts
- Payday loan amounts can be over $1,000 online and may be over $500 in-store, depending on your state and the lender.
- Some personal loan lenders offer small personal loans starting at as little as $1,000 or $2,000, but maximum loan amounts can reach $50,000 or more.
A select few lenders offer $100,000 personal loans and even $250,000 personal loans, but you’ll likely need very good or excellent credit to qualify.
Minimum credit score requirements
- Payday loan lenders don’t check your credit report, so there are no minimum credit requirements for payday loans.
- Most personal loan lenders do have minimum credit score requirements — they tend to prefer a FICO score of at least 640. But you can find personal loans with bad credit. Just expect fewer options, higher fees, shorter terms, lower borrowing amounts, and higher rates.
If you don't know your credit score, you can check it for free using Credible’s free credit-monitoring tool.
Approval and funding speed
You can typically get approved for a payday loan and receive funding the same day. Personal loan funding speeds vary. Some online lenders offer same-day personal loans, but the typical funding time is a few business days.
Examples of when each option is a better choice
In almost every scenario, a personal loan is a better choice than a payday loan. The repayment period is much longer, which makes payments lower, and the APR is likely to be considerably lower as well.
Scenarios when personal loans make more sense
Because you can use a personal loan for almost anything, they make a lot of sense in a variety of scenarios, including:
- Debt consolidation
- Paying for a move
- Home repairs and renovations
- Medical expenses and vet bills
Because many online lenders offer fast funding, you can get an emergency loan for unexpected expenses, like vet bills, car repairs, or paying an insurance deductible after a covered claim.
Scenarios when payday loans make more sense
If you can use a personal loan for an emergency, why would you ever use a payday loan? There are a couple of scenarios where a payday loan might make more sense — but they’re generally only when you need physical cash within hours or immediately.
- Very small loan amounts: Maybe you only need $100 to get you through until your next payday. Payday loans are usually $1,000 or less, while minimum borrowing amounts for personal loans are usually $1,000, $2,000, or even more. But first, check if your bank offers small bank loans or if your credit union offers payday alternative loans. If not, a cash advance app or BNPL app might be a better option.
- You’ve temporarily lost access to your accounts: If you’ve had to freeze your debit card because someone has stolen your information, you might consider a payday loan if you need cash now. But using a loan app online, BNPL, or asking a friend to spot you $50 is probably still a better option.
“If you need to put food on the table or pay your heating bill in the middle of winter, a payday loan might be the only option left. So it’s not that they never make sense. It’s more that if you go this route, you need to be absolutely sure you can pay it off in full,” says Weiss. “The real danger is getting caught in a cycle where you have to take out another payday loan just a few weeks later.”
According to Credible closed loans data, the top reason people borrowed $1,500 or less was to pay bills or rent.
Alternative funding options to consider
Personal loans and payday loans aren’t your only options for borrowing money when you’re short on cash. Here are some other ways to get an emergency loan, even with bad credit.
Friends and family
Before taking on high-interest debt with exorbitant fees, reach out to family and friends to see if they can spot you. A loan from a friend or relative may be more practical if you only need a small loan amount and you don’t have a history of borrowing from them already. To make sure the terms and expectations for repayment are clear, download a family loan agreement form and fill in the details.
Payday alternative loans (PALs)
Some federal credit union members may have access to a small, but lower-risk, loan option: payday alternative loans (PALs I and PALs II). These short-term loans are either capped at $1,000 or $2,000 and have repayment terms up to six or 12 months. Interest rates top out at 28%, and credit unions can’t charge more than $20 for members to apply.
Credit cards
If you have available credit on a credit card, it’s probably your go-to for covering an emergency expense. But if you need cash, your credit card may still come in handy. Credit card cash advances let you withdraw cash at an ATM. Rather than withdrawing money from your checking account, you’re tapping your available credit.
Credit card cash advances usually have an upfront fee and a higher APR than the purchase rate on your card. Plus, interest begins accruing immediately. Fees and interest can make them expensive, especially if you only make your minimum payment each month.
Cash advance apps
Cash advance apps like Dave, EarnIn, and Varo let you access money ahead of your next paycheck. You can typically borrow up to $500 per pay period, depending on the app, and the amount will automatically be deducted from your next paycheck.
Some apps charge monthly fees for the service, others request tips, and some may only charge for instant transfers (otherwise, money may take a day or two to process). Like payday loans, the fees may appear small. But the Center for Responsible Learning found that the average APR on a cash advance through an app, repaid in seven to 14 days, is 367%.
Look for a cash advance app with the lowest (or no fees), and never pay the instant transfer fee if you can avoid it.
Important
Cash advance apps, like payday loans, can be risky because they pull from your next paycheck. By design, you’ll have less money on your next payday, which may create the need to borrow again.
FAQ
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Disclosure: Some lending partners that participate in Credible’s comparison marketplace offer loans to borrowers with scores as low as 550. Borrowers with low scores will have fewer lending options than borrowers with higher credit scores.
