Cost Comparison and Application Process - Payday Loan vs. Personal Loan with Bank

Before deciding how to borrow the money you need, look at the advantages and disadvantages of payday loans versus personal loans. Payday loans help people who need cash urgently. They're meant to be paid back within a month, so you borrow the money for a very short time. The money is yours, often the same day, without a credit check.

There are limits on the amount you borrow with a payday loan. Every company has its own policy. The interest rates also vary from one lender to the next. Many payday loan companies also charge origination fees. It's very important to look closely at these numbers.

Looking at the rate table for a popular payday loan company, if you borrow $1,000 for two weeks, you must pay back the full $1,000 on the due date, plus another $220 in interest, leading to an interest rate of over 500%. You borrow $1,000 and repay them $1,220. Most payday loan companies restrict the amount you can borrow, so multiple loans become necessary.
  • If you borrowed $5,000, you'd pay back $6,100.

Secured Personal Loans

There are two types of loans offered by banks and credit unions. You are subject to a credit check for all personal loans. It can take days or even weeks before the money is in your account.

Secured loans require you to put something of yours on the line. If you borrow the money and don't pay them back, they take the item you offered in collateral, such as a car.

Banks have limits on the amount you must borrow. With TD Bank, there is usually a $5,000 minimum but no maximum. Fees depend on your location, but in Albany, New York, the origination fee if $50 and interest on your collateral loan is not going to be between 5.5% and 18%. If you borrow $5,000 for five years at 5.67%, your monthly payment is approximately $95.

  • You borrow $5,000, but repay $5,700.

Unsecured Personal Loans

An unsecured loan is riskier for the financial institution, because they gain nothing if you fail to repay the money you borrowed. With TD Bank, an unsecured loan of $5,000 has an interest rate of 9.15%. If you borrow $5,000 for five years, your monthly payment is around $104.
  • In the end, you pay $6,240, more than you'd pay if you took out and repaid the payday loans on time

With personal loans, you are restricted to the bank's minimum loan amount. If you need less than they allow, it's smart to use the excess to quickly pay down the loan.

It's also important to know that your credit score determines the interest rate you receive. The sample rates listed above are for those with good credit. The lower your credit score, the higher the rate. For example, with a secured loan of $5,000 that has the highest possible interest rate of 18%, your payment increases to about $130 a month.

  • This breaks down to $7,800 when you've paid it back.

Consider All Your Options

Before deciding if a paycheck loan or a personal loan is best for your situation, consider the options. Paycheck loans do get paid back faster, but personal loans save you money on interest. There are risks both ways. If you take out the paycheck loan and can't pay it back when it's due, you're stuck paying excessive amounts in additional interest. If you take out a personal loan and can't pay it back, you could lose your car or whatever you offered as collateral.