If you require funds to cover an unexpected expense you may be able to borrow it in many ways.

A payday loan is one of the options. This type of loan is simple to get but it could be extremely risky. These loans have the highest interest rates and usually come with hidden charges. This can cause you to fall into an unsustainable debt cycle that makes it extremely difficult to pay back the loan, even if the loan was just a tiny amount initially.

Another alternative is an personal loan. These loans are more difficult to get however they have lower rate of interest that payday loans. Due to this, personal loans are frequently utilized to pay off debts and are a more secure method of accessing credit.

Here’s everything you need to be aware of the differences between these types of loans and the best way to decide which one is right for you.

Payday Loans Compare to. Personal Loans: An Overview

Personal loans and payday loans share some similarities. In both cases, they borrow money that must be paid back with interest at a later date. Both loans are able to pay for emergency expenses and also to cover the costs of unexpected expenses, or to meet additional financial commitments.

They can be very different. They are typically used to get tiny amounts of cash until your next paycheck , and are easy to arrange. You don’t require collateral to secure these loans and they are costly. Due to this, they’re often referred to as precarious loans since they have extremely high interest rates, and do not take into consideration the ability of a borrower to pay and are accompanied by hidden terms which charge borrowers additional costs. ¹

Personal loans are a broad class. These loans are typically provided by banks, credit union, or online personal loan lender, and it is common to prove that you are able to repay the loan. Personal loans typically cover greater amounts of funds in comparison to payday loans, but you are required to pay this amount back. The rates of interest and fees for the personal loan are much lower than payday loans which means that the overall cost of borrowing will be less.

How Payday Loans Work

It’s generally very easy to obtain a payday loan. You can go into the office of a payday lender and leave with an advance. There is no requirement to pay any money to the lender to get the loan, similar to the Pawnshop. Instead the lender will usually request authorization to electronically transfer the money directly from your banking institution, credit union or the prepaid card account. Sometimes, the lender will request you to make a check for the amount of repayment, that the lender can cash upon the date you are due for the payment. ³

Payday loans are expensive. Payday lenders charge extremely excessive amounts of interest: up to 780 percent in annual percentage rate (APR) as well as the average rate of more than 400 percent. ⁴ Most states have laws on usury that restrict interest rates to anything between 5% and 30 percent. ⁵ However payday lenders fall within exemptions that permit their high-interest. 16 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 completely banned payday loans. ⁶ Seven states–Maine New Mexico, Ohio, Oklahoma, Oregon, Virginia and Washington have put in place a rule that is of a certain kind like fees limits, term limitations, or the number in loans per borrower, which give consumers some protection. ⁷

Payday lenders claim they charge high interest rates are a lie because when you pay back your payday loan in time, you won’t be charged a high rate of interest. In some instances, this could be true, however, 80percent of payday loans are renewed multiple times, as per the Consumer Financial Protection Bureau (CFPB) and this indicates that the majority of loans are not paid in the due date. ⁸