Question 1

How Payday Loans work

Accepted Answer

Payday Loans are small, short-term loans that you repay on your next payday. The amount you can borrow depends on your income and state laws. Since they’re unsecured, you don’t risk losing collateral like your car if you can’t repay the loan.

These loans can help cover emergency expenses, like medical bills or car repairs, and may be a better option than using credit cards or paying late fees. Approval is usually easier than for traditional loans, as lenders focus more on your income and job history than your credit score.

Question 2

How personal loans work

Accepted Answer

The term “personal loan” refers to any type of loan where an individual borrows a lump sum of money and repays the amount, plus interest, according to the lender’s repayment schedule. Payments made over time are often called “installments,” which is why most types of personal loans are considered Installment Loans. The credit requirements, interest rates, and payment amounts vary widely depending on the lender and the specific type of loan, so be sure to do your research!

A personal loan could be a useful financing option when you need to cover a larger expense, such as a wedding, travel, or home improvement. However, if you think you’ll need ongoing access to funds, a revolving Line of Credit might be a better fit.

➢RELATED: 7 Reasons to Get a Personal Loan

Question 3

Factors to consider

Accepted Answer

Credit requirements

Payday lenders focus more on income and job history than credit score, making these loans accessible even with less-than-perfect credit.

Payday Loans – Payday lenders typically have lenient requirements that allow borrowers with bad credit to borrow the money they need. Direct lenders look at factors besides your credit score, such as your employment history, current debts, and income.

Personal loans – Traditional personal loans often have minimum credit requirements, but those can vary widely by lender. Some will only lend to borrowers with high credit scores, while other lenders are willing to approve borrowers with fair or even low credit scores.

Process to apply

Payday Loans – It’s possible to complete the entire Payday Loan process in one day, from applying for the loan to receiving the funds in your bank account. Most lender applications are short and require basic information about your employment, income, and bank account. Approval decisions often take just minutes.

Personal loans – Applying for a traditional personal loan requires more information than an emergency loan application. Because there is more information for the lender to verify and review, you may need to gather more supporting documents, and the approval process can take a few days up to a week, provided there are no issues.

Cost and fees

Payday Loans – Since payday lenders approve all types of borrowers regardless of credit score, there’s a higher risk for the lender. The short repayment period also means less time to earn interest from loan payments. This means that borrowers can expect to pay higher interest rates.

Personal loans – Traditional personal loans tend to have lower interest rates and fees for borrowers than Payday Loans. The longer repayment period allows the lender to earn steady interest over the life of the loan rather than collecting it all at once.

How much you can borrow

Payday Loans – Payday Loans are small loans based on the borrower’s income and any state regulations that cap loan amounts. They’re intentionally kept small so that borrowers can pay them back in full on their next payday.

Personal loans – Personal loans typically allow you to borrow larger amounts of money than small emergency loans. Lenders will look at your employment situation, income level, and outstanding debts when they review your loan application. You could be approved for a few thousand dollars or tens of thousands of dollars, depending on your eligibility and the loan terms.

Time to fund

Payday Loans – As mentioned earlier, the entire Payday Loan process can be completed in only a couple of hours. If you’re approved later in the day and miss the window for same-day funding, you’ll receive your money on the next business day.

Personal loans – Once approved for a traditional loan, funding can take anywhere from one to seven business days, depending on the type of lender. Online lenders are the quickest, with small banks and credit unions taking the longest.

Repayment

Payday Loans – The repayment period is very short for Payday Loans, typically only 2-4 weeks.

Personal loans – The repayment period for a personal loan can be a few months to a few years, depending on the amount you borrow and the size of the payments.

Option to refinance

Payday Loans – Because Payday Loans are short-term loans with repayment terms of just a few weeks, lenders don’t offer a refinancing option for them.

Personal loans – Personal loans can often be refinanced with the lender to take advantage of lower interest rates, extend the repayment term and lower payment amounts, or get better terms if your credit score has improved since taking out the original loan.

Credit impact

Payday Loans – A Payday Loan won’t help improve your credit score because most payday lenders don’t report payment information to the credit bureaus. Late or missed payments, however, could negatively affect your credit.

Personal loans – When you apply for a traditional personal loan, you may notice a small dip in your credit score after the lender pulls your credit, but your score should recover within a few months. You may even see your score improve if the lender reports your payment information to the credit bureaus.

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