Guide To The Working Of Payday Loans And Personal Loans

Guide To The Working Of Payday Loans And Personal Loans

Lenders may have different requirements regarding credit score, income, and debt-to-income (DTI) ratios that are acceptable for Payday Advance loan approval. This can help you narrow down the loans that best fit your credit and financial profile.

It is usually very easy to get a payday loan. You can walk into a lender’s office and walk out with a loan. To secure the loan, you will not have to give anything to the lender, as in a pawnshop. Instead, the lender will usually ask you for permission to withdraw money electronically from your bank, credit union, or prepaid card account.

Payday loans can be expensive. Lenders charge very high interest: up to 780% annual percentage rate (APR), with the average loan running at almost 400%. Most states have usury laws that cap interest charges at anywhere from 5% to 30%.

However, payday advance lenders are subject to exemptions that allow their high-interest rates. Sixteen states—Arizona, Arkansas, Colorado, Connecticut, Georgia, Maryland, Massachusetts, New Jersey, Montana, New Hampshire, New York, North Carolina, Pennsylvania, South Dakota, Vermont, and West Virginia, as well as the District of Columbia—have outright bans extremely high cost of payday loans.

How personal loans work

To get a personal loan, you need to apply to a lender. It could be a bank, credit union, or online personal loan provider. In general, you should fill out an application first. The lender will review it and decide whether to approve or reject it. If approved, you will be provided with loan terms that you can accept or decline. If you agree with them, the next step is to finalize your loan.

When you do this, the lender will fund the loan, which means they will pay you the proceeds. Depending on the lender, these funds may arrive by direct deposit into your bank account or by check. After paying off the loan, you can use the money as you see fit.

Key differences

There are a few key differences between payday loans and personal loans when it comes to covering emergency expenses:

  • Cost: Payday loans generally have much higher interest rates than personal loans and can hit you with hidden fees and charges.
  • Impact on your credit score: Most payday lenders do not report to the credit bureaus. This means that only personal loans will appear on your credit report. If you take out a personal loan and make your payments on time, your credit score will increase, helping you get better loans and interest rates in the future.
  • Affordability: Payday advance loans can be easier to arrange, especially for people with limited credit history and other financial problems. With some payday lenders, you can even get a loan without a bank account if you have a prepaid card account.


In almost every situation, a payday loan will be more expensive than a personal loan. If you need emergency cash, the best thing to do is apply for a personal loan to see if you qualify. Then, if you don’t qualify, you can look at other options. Even then, it may be better to spend money on a credit card, ask your employer for overtime, or borrow money from family and friends.

Written by Enaa Mari

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