Don’t Confuse a Payday Loan With a Personal Loan

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.

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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 2.00% to 35.99% 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!
LenderRates (APR)Loan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Finance Lender Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (
  2. Personal LoansFixed rates from 5.49% APR to 14.24% APR (with AutoPay). Variable rates from 4.98% APR to 11.44% APR (with AutoPay). SoFi rate ranges are current as of December 21, 2017 and are subject to change without notice. Not all rates and amounts available in all states. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 4.98% APR assumes current 1-month LIBOR rate of 1.34% plus 3.89% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

2 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Personal Loan Rate Disclosure: Fixed interest rates range from 5.99% – 16.24% (5.99% – 16.24% APR) based on applicable terms and presence of a co-applicant. Lowest rates shown are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.
7.39% - 29.99%$1,000 - $50,000
Check rate nowon SLH's secure site
4.98% - 14.24%1$5,000 - $100,000
Check rate nowon SLH's secure site
8.00% - 25.00%$5,000 - $35,000
Check rate nowon SLH's secure site
5.99% - 16.24%2$5,000 - $50,000Visit Citizens
5.99% - 35.89%$1,000 - $40,000Visit LendingClub
5.25% - 14.24%$2,000 - $50,000Visit Earnest
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