Payday Loans vs. Personal Loans [What You Need to Know]
When many find themselves in financial binds and need quick cash, they often turn to payday loans. These loans are quick and easy to obtain, and the funds are usually available the same day you apply.
Although payday loans are convenient, they have some important negatives to consider. A personal loan from TEG Federal Credit Union, in comparison, may be a better choice.
The following is an overview of payday loans vs. personal loans to help you weigh the pros and cons of both financing options so you can make an informed borrowing decision.
How Do Personal Loans Work?
Both banks and credit unions offer personal loans, and they are not as difficult to qualify for as you might think. How much you can borrow depends on the lender, but amounts from as little as $100 to as much as $10,000 are possible.
Personal loans can be used for many different purposes, and no collateral is required. The application process is also easy, and most lenders now give you the option of applying in person, online, or by phone.
If you are approved for a personal loan, you will receive the funds within 1-7 days, although some lenders will approve and disburse the funds the same day the application is received. Personal loans have fixed interest rates, and you will repay the borrowed money with fixed monthly payments over several months or years.
The application process for personal loans is relatively simple. Information you may need to provide when applying includes:
- Proof of address
- Government-issued ID
- Proof of income and employment
A credit check will also be done when you apply for a personal loan. If you don’t have a stellar credit score, it’s still worth applying. Instead of focusing solely on your credit score, lenders also look at other factors when considering you for a loan.
Personal Loans Pros and Cons
Personal loans have several important pros to consider. As previously mentioned, they are highly flexible and can be used for many different purposes. There are usually few or no restrictions on their use, and you may be able to borrow more with a personal loan than a payday loan.
Interest rates for personal loans are much lower than payday loans. Interest rates will vary depending on the lender but are usually between 6% and 36%, according to Experian data.
Personal loans also allow you to repay the money you borrow over several months or years. This helps with budgeting, and it also helps you keep your monthly payments low.
An important negative to consider with personal loans is that some lenders charge fees and penalties. A loan origination fee may be charged, for example, and a prepayment penalty may also be charged if you pay off your loan early.
How Do Payday Loans Work?
Payday loans are made with the promise to repay the full amount with interest the next time the borrower gets paid. The application process only takes a few minutes to complete.
When applying for a payday loan, you will be required to show:
- A recent pay stub
- Valid identification
- Bank account information
The amount you can borrow with a payday loan is usually between $50 and $1,000. If you are approved, you will receive the money immediately—there is no wait.
When you apply for a payday loan, you will be required to submit a post-dated check for the date of your next payday. You may also be given the option to have money withdrawn from your bank account.
If you are unable to repay a payday loan when the money is due, you may be able to ask the lender to extend the due date to the next payday. If the lender agrees, additional fees and interest will be added to the total. If the lender doesn’t agree, either the post-dated check you submitted will be processed or the funds will be automatically deducted from your bank account, which could result in an overdraft fee if you don’t have the money to cover it.
Payday Loans Pros and Cons
The primary advantage of payday loans is that they are relatively easy to obtain. It may not even matter if you have bad credit since a credit check may not be done.
A very important negative of payday loans to consider is their sky-high interest rates. They are so high, in fact, that many consider payday loans to be a form of predatory lending.
How high are the interest rates for payday loans?
According to CNBC, the average payday loan interest rate is 404%, and in some places, the rate can be over 600%. These extreme interest rates can cause a small amount of money to balloon into a large amount very quickly. This can cause borrowers to get trapped in a cycle of debt that may be difficult to break free from.
Borrow Smart With a Personal Loan from TEG FCU
The payday loan vs. personal loan debate is easy to settle once you consider the exorbitant interest that payday loans charge. Personal loans, in comparison, are much more affordable, give you more time to repay the money you borrow and are relatively easy to qualify for.
If you are considering applying for a loan, TEG Federal Credit Union offers personal loans with competitive interest rates, flexible loan terms, and there are no application fees or prepayment penalties. The application process is quick and easy, and you can do it either online or in person.
A popular use for personal loans is the consolidation of high-interest debts like credit cards, store cards, pawnshop loans, and even payday loans. If you are considering a personal loan for this purpose, the following article can help you understand how the process works.