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Personal Loans and Payday Loans: Two Major Differences

Personal Loans and Payday Loans: Two Major Differences

Personal loans and payday loans are two different financial products.

You have two different choices for getting a loan when you want to borrow money; they are personal and payday loans. A personal loan is quite affordable, and this type of loan makes more sense in most situations. Payday loans, on the contrary, are expensive most of the time and should be evaded when possible.

However, the two factors differentiating personal loans and payday loans are payoff time and cost of borrowing, and these differences matter. 

1. Cost of Borrowing

Practically in all circumstances, payday loans are costlier than personal loans. When you get a payday loan, you typically pay an upfront fee ranging from $10 to $30 for every $100 you borrow. Hence, if you borrow $100, you own $110 or $130 in total when getting the loan. You might think it doesn’t seem much, but according to the Consumer Financial Protection Bureau, it truly sums up to an actual annual percentage rate (APR) of 400% or more.

On the contrary, personal loans don’t charge any upfront fees. However, if you are charged any origination or application fee, it contains a minor percentage of your total borrowings. In personal loans, instead of an upfront fee, you pay the interest for borrowing. 

The rates offered in personal loans differ significantly depending on your financial credits, but it typically lies between 10% and 28%. In a few cases, it is even possible to get better than the above rates. 

But generally, the real interest rate and fees charged in a personal loan will still be less than the charges on a payday loan. 

2. Payoff Time

Another big difference between a personal loan and a payday loan is payoff time. When you get a personal loan, usually, the payback time is one year. But there are cases where you might have a longer period, like a whole decade, to make your payments. The payoff time depends on the amount of loan and the lender you are borrowing from. For a personal loan, when you pay off the loan in a more extended period, it makes your monthly payments quite affordable, and you can make the payments within your budget.

On the other hand, a payday loan is explicitly made as a short-term loan. Generally, you have two weeks to pay off the entire loan amount along with the fee charges you owe on a payday loan. This is where the problem lies because you’ll need to arrange a lump sum amount within a short time. 


Usually, people that are in dire and immediate need of cash take payday loans. But, unfortunately, suppose you take a payday loan due to a financial crisis. In that case, there are few chances your financial position will improve greatly within two weeks where you have to be ready to pay back the loan. 

The outcome is that most people fail to repay the full amount of the loan from their paycheck, which leads to getting more loans and more fees; this ultimately creates a debt spiral. All your future paychecks are then owned by a payday lender instead of going into your bank account. Moreover, the payday allows you to take another payday loan for your expenses since you don’t have your paycheck anymore. 

Payday loans have certain disadvantages in terms of these factors; payoff time and borrowing cost compared to personal loans. If you have options, always choose a personal loan over a payday loan. Make sure you read the terms and conditions of the lender you are borrowing from, along with the total cost of the loan you will repay and the period you become debt-free. 

About James Morgan