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Many towns have at least one: a local loan business offering fast cash — say, $500 or less — in the form of a very-short-term loan that borrowers repay on their next payday. These so-called payday loans are a big business, but are also controversial due in part to their high cost for customers.
If you need cash quickly, a personal loan is another option. Get the lowdown on payday loans vs. personal loans and determine which one can help you wriggle out of your money crunch.
Key Points
• Personal loans are typically lower-cost, longer-term installment loans, while payday loans are very-short-term, high-cost loans.
• Average borrowing costs for a personal loan are lower than those for a credit card and significantly lower than those for payday loans.
• Payday loans’ fees quickly accumulate, making it easy for borrowers to fall into a debt cycle.
• Unlike personal loans, payday loans are restricted or banned in many U.S. states due to their predatory nature.
• Key differences include loan amounts (personal loans up to $100,000; payday loans typically $500 or less) and repayment terms (personal loans two to seven years with fixed payments; payday loans a single lump sum in two weeks).
Personal Loans vs. Payday Loans: At a Glance
A quick look at personal loans and payday loans reveals some similarities, as well as important differences. Both personal-loan and payday-loan lenders charge customers money — in the form of interest, fees, or both — to borrow funds.
One important difference between the two borrowing methods is that personal loans require a credit check and screening of the borrower’s other financial qualifications. Payday loans’ only requirement is that borrowers promise to repay what they borrow and supply a post-dated check or authorize a bank debit that allows the lender to debit their account for payment.
Another key point of differentiation is that personal loans are available in all U.S. states. Payday loans are restricted or banned in many states. With that in mind, we’ll take a closer look at both loan types.
What Is a Personal Loan?
A personal loan is an installment loan issued by a bank, credit union, or online lender. Borrowers can typically access anywhere from a few hundred dollars to $100,000, depending on needs and qualifications. Personal loans sometimes — but not always — have loan initiation fees or other fees associated with borrowing, and they almost always involve paying interest.
The average personal loan interest rate in early 2026 was 11.40%, according to the Federal Reserve Bank of St. Louis. This makes personal loans an attractive alternative to credit cards when it comes to covering large expenses. The average credit card interest rate was 21.00% in the same time period.
Personal loans are typically unsecured, meaning you don’t have to risk giving up an asset, such as a home or car, if you can’t repay what you borrow. The repayment term can be anywhere from two to seven years, and during this time the payment amount is often fixed, meaning your payment will be the same each month.
Some banks offer personal loans called emergency loans, which can be a popular alternative to a payday loan. But personal loans are also used by borrowers to fund a wedding, cover medical expenses, or to pay off high-interest credit card debt via a credit card consolidation loan.
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Before approving a borrower for a personal loan, a lender will examine the applicant’s credit score, debt-to-income (DTI) ratio, and proof of income and employment. There is no hard-and-fast rule about the minimum credit score required for a personal loan. Some lenders allow loans if an applicant has a low credit score, but many will look for a minimum score of at least 620. And a stronger credit score will help an applicant qualify for the best available interest rate.
It will likely be necessary to have a DTI ratio under 50% to qualify for a personal loan, and some lenders have an even lower threshold. To compute your DTI ratio, add up your monthly debts (car loan payment, student loan payment, credit card debt minimum payment, even alimony if you pay it). Divide that by your gross (pretax) monthly income. Multiply by 100 to arrive at your DTI percentage.
Pros and Cons of Personal Loans
Pros: Personal loans are unsecured loans, have lower interest rates than credit cards, and can be used for any legal purpose. Lenders report to credit agencies, so keeping current on personal loan payments is a good way to foster a healthy credit score.
Cons: Getting money with a personal loan isn’t always as fast as obtaining a cash advance with a credit card or getting a payday loan. Although some loan applicants are approved on the same day, it can take up to a week to be approved. If you fail to repay your personal loan, your credit score will take a hit.
Recommended: How to Avoid Predatory Loans
What Is a Payday Loan?
There is no official definition of a payday loan, but these are typically very-short-term loans for $500 or less that have high interest rates and are meant to be repaid on the next payday. Payday lenders, which might be brick-and-mortar storefronts or online businesses, typically don’t require a credit check or have other criteria for lending. They do, however, exact a promise to repay the loan in advance. This might involve having the borrower write a post-dated check for the amount owed or having the borrower authorize a bank debit to pay for the loan.
If the borrower doesn’t make their loan payment on time, the lender would cash the check or proceed with the debit. If the borrower cannot pay, the lender typically rolls the debt forward and charges the borrower another fee. Here’s how it might work in real life:
You borrow $500, and the payday lender charges you a fee of $100, or 20% of the loan amount. You agree to repay the money in two weeks. If you don’t repay the money, the lender will roll the debt forward and charge another $100 for two weeks. Now you’re up to 40% in fees on that $500 loan in the space of only a month. The annual percentage rate (APR) on that loan is greater than 500.00%.
Concerns about how quickly consumers can find themselves deeply in debt via payday loans has led eight states to ban payday loans outright and 10 other states to place caps on what payday loan companies can charge. Many experts consider payday loans a type of predatory lending.
Pros and Cons of Payday Loans
Pros: If payday loans have any advantage, it is that they are very easy to access, with no credit check required. Payday loans also allow borrowing fairly small sums of money — sometimes less than $500, while some banks have a minimum for a personal loan of $1,000.
Cons: The chief drawback of a payday loan is that the costs can rapidly accumulate on even a small loan amount, and the borrower can quickly — in a matter of weeks — be struggling to pay what’s owed.
Key Differences Between Personal Loans and Payday Loans
Here’s a quick look at a payday loan vs. installment loan so that you’re fully aware of how they differ.
| Personal Loan | Payday Loan | |
|---|---|---|
| Typical Loan Amount | From a few hundred dollars up to $100,000 | $500 or less |
| Cost (Interest and Fees) | Average interest rate around 11.40% (early 2026); APR typically tops out around 36.00%. | With fees of 20% for 2 weeks, APR can exceed 400.00% |
| Requirements | Borrowers must meet credit score, DTI ratio, and proof of income requirements | Typically no credit check or other qualifying factors |
| Repayment Term | Typically 2 to 7 years | Very short-term, meant to be repaid on the next payday (in 2 weeks) |
| Repayment Structure | Fixed monthly payments | Single lump-sum payment |
| Collateral | Typically unsecured (no collateral needed) | Unsecured, but repayment is often secured by a post-dated check or bank debit authorization |
| Risk | Moderate risk; based on ability to repay over a long term | Very high risk; easy to fall into a debt cycle due to rapidly accumulating fees |
The Payday Loan Debt Cycle: What to Watch Out For
Regulators have long been concerned that payday loans are a form of predatory lending, as noted above. The trouble comes when borrowers, who may be in difficult financial circumstances to start out with, can’t repay the loan.
With payday lending APRs that can top 400.00%, it’s easy to fall into a downward spiral of debt, automatically rolling debt over into ever-larger amounts to cover what is owed. It’s no surprise, then, that many payday loan borrowers end up taking out a type of personal loan called a payday loan debt consolidation loan.
Alternatives to Payday Loans
The clearest available alternative to a payday loan is a personal loan, which is why personal loans vs. payday loans is a common consideration for many consumers. But there are other options as well:
Choose a bank with early paycheck advance Some banks allow customers who have their paycheck directly deposited into their account to access cash before their actual payday, sometimes up to two days in advance.
Borrow from a family member or friend Payday loans are often for a relatively small amount of money, such as a few hundred dollars. If you have an urgent need, you may be able to borrow that money from a personal connection, often without interest.
Consult a credit union Some credit unions offer small loans at relatively modest interest rates and with more flexible criteria for borrowing than a large bank would have.
Take a credit card cash advance Credit card interest rates can be fairly high, but
Ask for a payroll advance A payroll advance is a short-term loan from your employer that you would repay by having money deducted from future paychecks. Some employers charge administrative fees, but the cost of advanced pay is usually far less than for a payday loan. Check with your payroll department to determine if your employer offers this option.
Recommended: Personal Loan Calculator
The Takeaway
Considering a payday loan vs. personal loan? Personal loans and payday loans both allow borrowers to access cash, but the experience is quite different. Although personal loans have a few more hoops to jump through before a loan is approved, the cost of borrowing with a personal loan is usually much lower than that of a payday loan. And personal loans are available nationwide, while payday loans are banned in many states. If you’re considering a personal loan, seek out interest rates and explore terms with several lenders to ensure you find the relationship that is right for you.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.
FAQ
Can you use a personal loan to pay off a payday loan?
It is possible to use a personal loan to pay off a payday loan and its associated fees. Some borrowers turn to payday loan debt consolidation loans for exactly this purpose.
Do payday loans affect your credit score?
Payday loans generally aren’t reported to credit agencies, so they usually have no effect on your credit score, good or bad. The exception is if you can’t pay back your payday loan and the loan is sold to a debt collection agency. In this case, the agency might report your failure to pay, and the effect on your credit score would be negative.
What happens if you can’t repay a payday loan?
When borrowers can’t repay a payday loan, the agreement often specifies that the loan will roll forward another two weeks and a fee will be added on. These fees can quickly add up, making it difficult to get back on track with payments, especially for borrowers who were already in precarious financial circumstances to begin with.
Are payday loans legal in every state?
A key difference in a payday loan vs. personal loan is that payday lending is illegal in eight states and highly restricted in other states. The states that ban payday loans are: Arizona, Arkansas, Connecticut, Georgia, Illinois, Kansas, Maryland, and Oklahoma. Ten other states have a cap on lending costs such that payday lenders often don’t do business in these states. When considering a payday vs. personal loan, the availability of payday loans in a particular state is a major consideration.
What credit score do you need to qualify for a personal loan?
Borrowers usually need a credit score of 620 or better to obtain a personal loan, however some lenders may set minimums that are lower or higher. The better your score, generally speaking, the more favorable your personal loan interest rate.
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