Your car just broke down, and the mechanic told you it'll cost more than a week's paycheck to cover the repair cost. But all the money you'll get for this week and next week's pay has to go to bills!
And what's worse -- you don't think you have a high enough credit score to qualify for a loan from your bank. You start to panic.
Take a deep breath. You actually have two solid options your East Texas neighbors in Tyler, Longview, and Dallas use every day to get them through financial emergencies: personal loans and payday loans. But what's the difference between the two, and which one is best for your needs?
What Is a Payday Loan?
Think of a payday loan as more of a cash advance. It is a one-time borrow paid against money you know you will get in your paycheck. You can usually secure only a small amount, about $500 or less.
When you compare short-term loans, you will find payday loans carry much higher fees than other types. The interest rates may be up to 400%, which means you will end up paying back more than you borrowed. Payday loans do not require a credit check, so many people with bad credit think this is their only short-term cash solution.
Alternatives to Payday Loans
Payday loans come with several drawbacks. They often have short repay periods, and collection tactics can be aggressive. People too often fall into the habit of taking out payday loans when they need cash, which hurts their credit score. You can find many alternatives to payday loans, the most obvious being a personal loan, which offers a larger draw and more favorable interest rates.
Since payday loans are often for smaller amounts than personal loans, you have flexibility for finding other sources of funding. These alternatives include:
- Credit cards
- Drawing on your savings
- Asking a family member or friend for assistance
What Is a Personal Loan?
A personal loan is money you borrow from a lender and pay back over a more extended period, usually years. Personal loans tend to be larger than payday loans, often thousands of dollars. The lender will look at credit reports and other evidence to see if you are a good risk for money lending.
Many people get worried when they hear about the information we request on an application for a personal loan, but it's nothing to stress over. We just want reassurance you will pay back the loan. We look for evidence of stability and willingness to repay the money you borrow. We establish long-term relationships with borrowers based on your history with us and our interactions, not solely based on your credit score.
With lower interest rates on a personal loan, you will pay back a much lower percentage of interest than you do with a payday loan. Plus, you get all the facts about your loan upfront. There are no surprise fees later on, which often happens when you take out a payday loan.
How Does a Personal Loan Compare to a Payday Loan?
There are many ways a personal loan is better than a payday loan. In addition to offering more favorable lending terms, personal loans can improve your credit score when you pay them back steadily. They show your dependability and follow-through on completing your contract.
Many people still aren't sure which loan they should choose. They may mistakenly consider payday loans a smaller commitment because they tend to be for less money. Yet it's not the amount of the loan but the terms that are most important. Let's compare payday loans vs. personal loans:
- Personal loans often offer much higher loan limits than your average payday loan. This is typically because personal loans can be paid off over a period of many months, while a payday loan is supposed to be paid back as soon as possible.
- Payday loans are short-term loans with high-interest rates. They're designed to bridge the gap between one payday and the next. That's why it's critical that you repay them by your next payday at most -- if not, you could end up with a worse financial situation overall.
- To obtain either a payday loan or a personal loan, you'll be required to fill out an application to see if you qualify or not. Both payday loans and personal loans are forgiving of individuals with poor or bad credit scores, but personal loans are more forgiving in the long run.
- Both payday loans and personal loans allow for small loans of as low as a few hundred dollars. Personal loans allow borrowers to qualify for sums of up to $1,400.
- Neither personal loans nor payday loans request collateral, nor do they require co-signers. However, some companies may require borrowers to include a list of references along with their employment and bank information.
- Payday loans have significantly higher interest rates than most other loan options. The Consumer Financial Protection Bureau reported that people who take out payday loans end up paying more in interest than what the original loan was worth.
- Personal loans can be used to consolidate your credit card debt because they tend to charge lower interest rates than credit cards. Plus, some people even use personal loans to pay off their payday loan debt.
How to Find a Personal Loan
Ultimately, it's up to you to decide which loan option is best for you. But if you're leaning toward the benefits of a personal loan from a quality lender like Atlas Credit, consider applying online or in one of the many brick-and-mortar locations near you.
We can get you the money you need to solve your financial emergency or help you take care of any extra cost you need covered as soon as you're qualified! Apply now or contact Atlas Credit today to learn more about the personal loan process!