What you should know before renting

  • Payday loans tend to have very high interest rates and are often based on your income.
  • Personal loans are long-term installment loans that typically have lower interest rates than payday loans.
  • Payday loans are always a worse option than personal loans because of their high interest rates.
  • Read more stories from Personal Finance Insider.

Taking out a loan can be a helpful way to cover costs that you may not be able to cover right now. You may want to take out a loan to cover medical expenses, home renovations, or possibly even a vacation.

The most common forms of quick buck loans are payday loans and personal loans, although one is a far better option than the other.

payday loan vs. private loan: At a glance

  • A payday loan is a high-cost, short-term, unsecured loan, the principal of which is part of your next paycheck.
  • A personal loan is a long-term unsecured loan with higher minimum loan amounts and lower interest rates.
  • You can pretty much use the money from either of them however you like; Other than that, they have few things in common.

Stefanie O’Connell Rodriguez, host of the Real Simple’s Money Confidential podcast, recommends staying away from payday loans whenever possible.

“It’s a last resort, like avoiding it at all costs, really,” says O’Connell Rodriguez. “If you’re weighing something like, ‘Okay, do I use a payday loan, a credit card, or a personal loan,’ understanding that the payday loan is the last option might make that decision a little easier.”

what is a payday loan?

Payday loans are often for small amounts of money, usually $500 or less. They are intended for borrowers who are in need – maybe you need cash to cover an unexpected medical bill or a damaged item. Payday loans offer instant funds, carry extremely high interest rates, and are usually based on your income, not your credit history.

“Payday loans come at a price,” says Kendall Clayborne, a certified financial planner at SoFi. “You can have interest rates in excess of 600%. Such high interest rates, not to mention other associated fees, can quickly result in you defaulting on your loan and having to borrow more and more to pay it back.”

Payday loans are never a better option than personal loans. They have extremely high interest rates and are often predatory in nature.

“If anyone were to ask me personally, under no circumstances would I recommend a payday loan,” says Annie Yang, strategic financial advisor at Real Estate Bees.

You can get a payday loan by going to a brick-and-mortar lender or through an online lender. When you take out a payday loan, you often agree to give the lender permission to withdraw money from your bank after your check is deposited. The lender may require a signed check so that they will receive the money shortly after your next paycheck.

What is a private loan?

With a personal loan, you apply for a certain amount of money. The lender will show you available offers depending on financial factors such as your credit score, debt-to-income ratio, and ability to repay the loan. You can use a personal loan for a variety of reasons, including home improvement, medical bills, and vacations.

“Personal loans come with a credit check to qualify, but you have a longer term to repay them,” says Clayborne. “Your repayment schedule can be less stressful — you have the flexibility to pay over the course of a few years instead of a few months. With a longer payment term, your personal loan may be more manageable than a payday loan.”

Personal loans are always a better option than payday loans because they come with lower interest rates and the loan decision is based on your ability to repay.

Online lenders, banks and

credit unions

gives you money that you pay back over a set period of time, say a year or five years. Personal loans are almost always unsecured, meaning they don’t need collateral — like a home or car in the case of a mortgage or car loan — to obtain them. Most personal loans have fixed interest rates that stay the same over the life of the loan.

Whether you decide to take out a loan or not, O’Connell Rodriguez recommended that you don’t judge yourself too harshly based on your financial circumstances.

“Have compassion on yourself,” O’Connell Rodriguez said. “Understand that if you are in dire straits, if you are in debt, if you are in a very bad financial situation, your location says nothing about your identity, says nothing about what you are capable of or who you are. It doesn’t define your goodness or worth.”

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