Online lending for short-term loans is all the rage these days, and you may want in on it.
Just be mindful of what turns up if you Google “online loans.” What you’re probably looking for are personal loans not payday loans.
However, you are going to get a few payday loans in the mix – short-term, high-interest lending models that will eat you alive. While you should avoid anything that calls itself a payday loan, be on the lookout for lenders who are doing the same thing by a different name.
What payday loans sound like
Bad credit? No problem
Payday lenders are so unconcerned with your credit that most don’t even bother checking for it.
That would never be the case with a personal loan. That’s how they make lending decisions. Real personal loan lenders use your credit to determine your interest rate and whether they’re going to approve you for the loan at all.
No job? No problem
It’s not the case across the board, but many payday lenders don’t care whether you’re working or not. All they need to see is proof that you have money coming in somehow, someway.
To be approved for a personal loan, you should expect lenders to ask you for employment verification, pay-stubs, and possibly tax returns or W-2s.
Pay us back when you get paid
Thus, the term “payday” loan. It might be in a week. It might be in a month. Usually, though, it’s 2 weeks.
Of course, most people already have their next paycheck earmarked for other things. So it’s often a pretty unrealistic promise. But when you’re in a tight spot right now, it’s hard to see past today.
The personal loans you’ll find online are short-term loans, too, but usually for terms of 2 to 5 years. And most importantly, included in the terms of a personal loan is a realistic plan for paying it back in fixed monthly installments. Yet another reason to pick personal loans not payday loans.
Don’t worry about sending in the money – we’ll take it from you
When the loan comes due on your next payday, payday lenders debit the full amount due from your bank account.
With a personal loan, you control how and when you make your payments. Obviously, you want your payments to be on time. But if you need to be late one month, you can be with a personal loan. You simply pay the late fee attached to the delayed payment.
On the other hand, if you want your personal loan payments to come out of your account automatically, you can simply set up autopay through your bank. That still leaves you in control, with the ability to cancel the automated payments anytime.
Can’t pay it back? Just roll it over
No big deal, right? It’s just another $30 fee to give yourself another two weeks to come up with the full amount. But the problem with renewing the loan like that – or “rolling it over” – is how easy it is to do and how seriously the finance charges add up.
According to the Consumer Financial Protection Bureau (CFPB),“The cost of the loan (finance charge) may range from $10 to $30 for every $100 borrowed. A typical two-week payday loan with a $15 per $100 fee equates to an annual percentage rate (APR) of almost 400%.”
Personal loans come with APRs that are a fraction of that cost. Top online lenders SoFi, Payoff, Upstart, Prosper, LendingClub, and Avant have APRs ranging from 4.99% to 199.00% on personal loans.
We only report to the credit bureaus when it’s bad
The only way a payday loan can impact your credit score is by making it worse. That’s because payday lenders only report your payment history when you fail to make payment.
How does that happen with their direct debit payment process? It happens when there’s no money in your account to cover it. If you don’t cough up the money, your credit score pays for it.
Personal loan vs payday loan
Some states have restrictions on rollovers, but some don’t and the consequences can be huge. You could end up paying more fees than the original loan amount with a payday loan.
According to the CFPB, “For 22 percent of new loans, borrowers end up renewing their loans six times or more. With a typical payday fee of 15 percent, consumers who take out an initial loan and six renewals will have paid more in fees than the original loan amount.”
You’re not going to get into a situation like that with a personal loan, even with a high-interest rate. That’s why you should make sure you’re paying off personal loans not payday loans.
Let’s say you take out a $5,000 loan for a 3-year term at a whopping 36.00% APR. More than 60 percent of the payments made will go toward the principal. To the other extreme, if you take out the same $5,000 for a 3-year term at 5.99% APR, more than 90 percent of your payments go toward the principal.
Go for personal loans not payday loans
At the end of the day, you want personal loans not payday loans. Now that you know the difference, here’s a great place to start looking for one.
And if you’re considering getting a personal loan for paying off a student loan, consider your options first before going down that route. It might not be the best choice for paying off your student loan debt.
Yes, in the personal loan vs payday loan showdown, the personal loan wins every time.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|5.81% – 15.37%1||$5,000 - $100,000||Visit SoFi|
|6.87% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|5.49% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|