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Personal and payday loans might be on your radar if you need quick access to cash. While both can provide financial relief when needed, they each have advantages and disadvantages. Their rates, repayment terms, requirements, and application processes differ. Here, we’ll walk you through the key differences between personal loans and payday loans.

What are payday loans, and how do they work?

Payday loans are a quick-fix solution for immediate cash needs. They have a fairly straightforward application process, and no credit check is required.

So why are payday loans so much easier to qualify for than traditional bank loans? First, they have less strict lending requirements. For instance, you typically only need a bank account, a form of identification, and proof of income, like a pay stub.

With payday loans, you can step foot into a payday loan center and have cash in hand, or have the funds dropped into your account within the next business day. Payday loan amounts are usually small, and many max out at $500.¹

So how do payday loans differ from other types of loans? While fast and convenient, payday loans are known to have very high fees – $10 to $30 for every $100 borrowed. The full amount is due in full on your next payday. So if you owe $15 for every $100 loaned, that’s the equivalent of an APR of 400%.²

Because of these high fees, which can be viewed as predatory, payday loans are banned in several states, including Arizona, Arkansas, Connecticut, Georgia, Illinois, Maryland, Massachusetts, Montana, Nebraska, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Pennsylvania, South Dakota, Vermont, and West Virginia, and Washington, D.C. Plus, they’re restricted in a handful of other states.³

If you’re looking at a cash advance versus a payday loan, you can get a cash advance through a cash advance app or your credit card issuer. While you need to pay off your payday loan by your next payday, you can make payments over time with a cash advance. Cash advances do, however, come with higher interest rates and fees.

Set up direct deposit with Chime to get paid up to two days early.*

Pros and cons of payday loans

While payday loans are considered a form of predatory lending and are banned in some states, if it is an option for you, it’s important to get your head around their advantages and disadvantages.

Pros of payday loans

Let’s start with the benefits:

  • No credit check. These loans are more accessible if you have limited or no credit history.
  • Simple application. You can usually get a payday loan with proof of income, such as a paystub, a form of identification, and a bank account.
  • Quick funding. You can usually receive the money the same day or within the next business day.
  • Flexible use. You can essentially use the funds for any immediate need.

Cons of payday loans

Now, we’ll go over the drawbacks:

  • Small loan amounts. Lending amounts for payday loans are usually capped at $500.
  • Short repayment terms. You’re expected to repay the loan in full by your next payday, which can cause financial strain.
  • Costly. As mentioned, APRs can be 400% and upwards. If you can’t pay your loan by your next payday, you’ll need to do what’s known as a “rollover,” which means an additional fee. Plus, you still need to continue paying off your existing loan, which can quickly get expensive.
  • Potential debt cycle. If you find yourself continuing to take out another payday loan or rollover your existing ones, this could mean very high interest rates and fees. In turn, you might find yourself in a cycle of debt.

For strategies to manage or avoid such financial pitfalls, learn more about emergency loans.

What are personal loans, and how do they work?

Personal loans offer larger amounts with longer repayment terms than payday loans. You can get a personal loan through a bank or online lending platform. The repayment term is anywhere from one to seven years, and depending on the lender, you can borrow amounts from $500 to $100,000.⁴

Interest rates for personal loans also tend to be far lower than that of payday loans. According to data from the Federal Reserve, you’re looking at an average of 12.3% for a 24-month loan. Generally, interest rates for personal loans can hover between 6% to 36%.⁵

They also tend to be unsecured, which means you don’t need to provide collateral. Some personal loans are secured, which means the bank can seize the asset you put up for collateral should you struggle to keep up with your loan payments.

The personal loan requirements and application process are more involved than those for payday loans. The lender will do a hard inquiry of your credit, and approval depends on your credit and financial factors such as your credit score, debt-to-income (DTI) ratio, and income.

Pros and cons of personal loans

While personal loans do have advantages, it’s important to note the potential downsides. Let’s look at both their pros and cons.

Pros of personal loans

Here are some of the advantages of personal loans:

  • Fixed monthly payments. Because personal loans have predictable repayment schedules with fixed payments, it can simplify your budgeting.
  • No need for collateral. Most personal loans are unsecured, requiring no collateral. However, the lending criteria might be more strict, and the interest rates might be higher than with a secured loan.
  • Versatile use. The funds from a personal loan can be used for a variety of financial goals, from debt consolidation to home improvements to covering a cash shortfall.
  • Higher loan amounts. Depending on the lender and what you qualify for, you can borrow up to $100,000.

Cons of personal loans

Now, let’s look at some of the disadvantages:

  • High interest rates. Interest rates for these loans can be high if you have poor or fair credit.
  • You might borrow more than you need. If you do, you’ll be on the hook for monthly payments and interest fees longer than you would like. It’s crucial to only borrow what you need and can reasonably afford to pay back.
  • Fees and penalties. Some loans come with additional costs. For instance, an origination fee for a personal loan can be anywhere from 1% to 6% of the loan amount.⁶ Let’s say you borrow $2,000. The origination fee is 3% of the loan amount, which is $60.
  • They could hurt your credit score. Fall behind on your payments, and it could lower your credit.

Personal loans vs payday loans: key differences

While personal and payday loans are versatile, they have some major differences. Let’s take a look:

Payday loans offer a quick – but very expensive – solution for short-term financial needs. Unfortunately, payday loans often don’t consider your ability to repay. They come with high fees, and payments typically aren’t reported to credit bureaus. Even if you stay on top of your payments, you’re looking at APRs of 400% and upwards.

Personal loans present a more affordable option for borrowing larger amounts—these installment loans factor in your ability to pay it back and lower interest rates. Your payments are usually reported to credit bureaus and appear on your credit report. In turn, it could potentially help build your credit.

Options beyond payday and personal loans

Payday loans and personal loans aren’t your only choices. Let’s look at a few financing alternatives:

Payday alternative loans (PALs). Offered by credit unions with lower fees and longer repayment periods, PALs can provide up to $2,000 with a loan term of anywhere from one to 12 months.⁷

Credit cards. While an easy way to get quick access to cash, credit cards accrue interest if you don’t pay off your balance. Ideally, you’ll want to lean into credit cards for short-term financing and if you can pay off the balance quickly.

Secured loans. You do have to offer collateral, but secured loans tend to have lower interest rates and less stringent lending criteria. If you are comfortable offering an asset to back up your loan, this might be a good option for you.

Cash advance apps. These apps offer small advances from your next payday. Instead of charging interest, they might charge fast-funding fees or subscription fees. They might also ask you to provide a tip or pay it forward.

Friends and family. Family loans potentially are an interest-free option. However, you’ll need to handle them with sensitivity and thoughtfulness. You could draft a contract and lay out expectations on both ends.

Weigh the benefits and drawbacks

Payday loans offer quick access to funds, but they also come with staggeringly high costs and the risk of getting trapped in a debt cycle. On the other hand, personal loans provide fixed, predictable monthly payments and potentially are a more cost-effective way to borrow.

Before deciding on any loan, consider your unique financial situation and all available options. Don’t have stellar credit but want to get a personal loan? Learn how to get a personal loan with no credit.

Chime® is a financial technology company, not a bank. Banking services are provided by The Bancorp Bank, N.A. or Stride Bank, N.A., Members FDIC. The Chime Visa® Debit Card and the Chime Credit Builder Visa® Credit Card are issued by The Bancorp Bank, N.A. or Stride Bank pursuant to a license from Visa U.S.A. Inc. and may be used everywhere Visa debit and credit cards are accepted. Please see the back of your Card for its issuing bank.

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‡ SpotMe® for Credit Builder is an optional, no interest/no fee overdraft line of credit tied to the Secured Deposit Account. SpotMe on Debit is an optional, no fee service attached to your Chime Checking Account (individually or collectively, “SpotMe”). Eligibility for SpotMe requires $200 or more in qualifying direct deposits to your Chime Checking Account each month.

Opinions, advice, services, or other information or content expressed or contributed here by customers, users, or others, are those of the respective author(s) or contributor(s) and do not necessarily state or reflect those of The Bancorp Bank, N.A. and Stride Bank, N.A. (“Banks”). Banks are not responsible for the accuracy of any content provided by author(s) or contributor(s).

¹ Information from FTC's What to Know About Payday and Car Title Loans as of March 5, 2024: https://consumer.ftc.gov/articles/what-know-about-payday-and-car-title-loans

² Information from Consumer Finance Protection Bureau's What Is a Payday Loan? as of March 5, 2024: https://www.consumerfinance.gov/ask-cfpb/what-is-a-payday-loan-en-1567/

³ Information from Pew Trusts' How Well Does Your State Protect Payday Borrowers? as of March 5, 2024: https://www.pewtrusts.org/en/research-and-analysis/data-visualizations/2022/how-well-does-your-state-protect-payday-loan-borrowers

⁴ Information from Bankrate's Best Personal Loan Rates of March 2024 as of March 6, 2024: https://www.bankrate.com/loans/personal-loans/rates/

⁵ Information from Federal Reserve Economic Data's Finance Rate on Personal Loans at Commercial Banks, 24 Month Loan as of March 5, 2024: https://fred.stlouisfed.org/series/TERMCBPER24NS

⁶ Information from National Credit Union Administration's Payday Alternative Loan Rule Will Create More Alternatives for Borrowers, as of March 5, 2024: https://ncua.gov/newsroom/press-release/2019/payday-alternative-loan-rule-will-create-more-alternatives-borrowers

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