Payday Loan vs. Personal Loan: What’s the Difference?
Written by
Daria Uhlig
Edited by
Melanie Grafil
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A payday loan is a small, short-term loan that’s usually due in full on your next payday.
A personal loan is different because it allows you to borrow much more and make payments over several years.
Here’s how to decide which is right for you.
Key Differences Between a Payday Loan and a Personal Loan
| Feature | Payday Loan | Personal Loan |
|---|---|---|
| Loan amount | Usually $500 or less | $1,000 to $100,000 or more |
| Funds received | As soon as the same day | Usually within a few days of loan approval |
| Interest type | Fixed rate, can exceed 600% APR | Fixed rates ranging from 6.5% to 35.99% |
| Loan term | 2 to 4 weeks | 2 to 7 years |
| Collateral required? | Not usually | Not usually |
| Best for | Short-term cash emergencies | Larger expenses |
| Credit needed | N/A | 580 or higher for most loans |
| Common uses | -Bill payment -Home or auto repair |
-Major auto or home repair -Home renovation -Debt consolidation |
What Is a Payday Loan?
A payday loan is a loan you take out until payday. When you accept the funds, you give the lender a postdated check or authorization to withdraw the payment from your checking account on your next payday. If you’re unable to pay, the lender might roll the balance into a new loan to give you an additional pay period to come up with the cash.
Payday loans have interest charges and fees, which lenders deduct from the loan proceeds or add to your rolled-over balance. Rates can be extremely high. In fact, the average annual percentage rate for a payday loan with a two-week term and $15 fee per $100 borrowed is almost 400%, according to the Consumer Financial Protection Bureau (CFPB).
Most people use payday loans to cover important expenses that can’t wait until payday. You might use one to pay your rent rather than risk eviction, for example, or to repair a car you need to drive to and from work.
You can take out a payday loan in person from a local lender, or use an online lender. Many lenders don’t check credit, which makes payday loans easy to get as long as you have enough verifiable income.
What Is a Personal Loan?
A personal loan is a general-purpose installment loan. You can borrow between $1,000 and $100,000, although some lenders allow smaller or larger amounts. Loan terms are flexible, usually ranging from two to seven years. You repay the loan in monthly installments.
Some personal loan lenders charge an origination fee, which they deduct from the loan proceeds. And while personal loan interest rates can exceed 35%, rates from many lenders are comparable to mortgage rates.
Personal loans are a good choice for major expenses, such as:
- Debt consolidation
- Home improvements
- Medical bills
Many borrowers get personal loans from their banks. Personal loans are also available online, from banks and from nonbank lenders. Credit requirements are stricter than for payday loans, although some lenders specialize in personal loans for people with damaged credit.
How Does a Payday Loan Work?
Taking out a payday loan is fairly simple.
- Apply for your loan in person or online.
- Once you’ve been approved, follow the lender’s instructions for reviewing and signing the loan documents to finalize the loan and receive your cash. Provide a postdated check or your banking information for loan repayment.
- The lender will cash your check or withdraw your payment on the loan’s due date.
Some states allow the lender to roll the balance into a new loan, for the current balance due plus fees for the new loan, if you can’t repay on time. However, any failure to repay can eventually lead to serious consequences, such collections and an eventual court judgement to garnish your wages.
How Does a Personal Loan Work?
A personal loan involves a more in-depth look at your credit and finances, but you get more time to pay it off.
- Apply in person or online. The lender will review your income and credit before making a decision.
- Once approved, review and sign the loan documents to finalize the loan and receive the funds.
- Make your monthly payments according to the schedule listed in your loan documents. Your final scheduled payment repays the loan in full.
Failure to repay a personal loan has similar consequences as failure to repay a payday loan, with one important addition. Each missed payment damages your credit.
Pros and Cons of Each Option
Payday loans and personal loans both have benefits and drawbacks that make them a good choice for some borrowers and a risky choice for others.
Payday Loan Pros
- Quick credit decision and funding
- Low or no credit requirements
- Automatic repayment within two to four weeks
Payday Loan Cons
- More expensive than other loan types
- Balance rollovers can result in exorbitantly high APRs
- Not available in every state
Personal Loans Pros
- Can borrow large sums
- Can be funded within a few days
- Flexible loan terms
Personal Loan Cons
- Rates can be high
- Most require good credit
- Some charge large origination fees
How To Choose the Right Option for You
Your best loan option depends on your preferences and financial situation.
| If You… | Go With… |
|---|---|
| Need less than $1,000 to get you through a temporary cash shortage | Payday loan |
| Have a large expense you need to finance | Personal loan |
| Have no credit or damaged credit | Payday loan |
| Might need more than a pay period to repay the loan | Personal loan |
| Want to consolidate high-interest debt | Personal loan |
| Want to borrow from a traditional bank | Personal loan |
How To Apply for a Payday Loan or a Personal Loan
Start the application process by gathering the documents you’ll need for your loan.
For payday loan, that typically means:
- Photo ID
- Recent paystubs — the lender will tell you how many
- Postdated check or information for the bank account you’ll use to repay the loan.
For a personal loan, you’ll need:
- Photo ID
- Paystubs
- W-2 and/or 1099 forms
- Possibly, tax returns from the last year or two
You can apply for payday and personal loans online or in person. You’ll find nonbank lenders for both types, but banks and credit unions only make personal loans.
A payday lender can provide instant approval and give you cash on the spot or deposit the money into your bank account almost immediately. Personal loans can move just as quickly, but some lenders take several days to approve your application and disburse the money.
Here are a few tips for getting your loan approved:
- If you’re considering a personal loan and have the luxury of time, check your credit report for errors that need to be corrected.
- Follow the application instructions carefully.
- Promptly respond to lender requests for more information or documentation.
FAQs About Payday Loans and Personal Loans
Get the answers you need about payday loans and personal loans below.- Which one is easier to get?
- Payday loans are easier to get because they don't usually have credit requirements. That's one reason why payday loans are so popular.
- How do payday loans differ from other types of loans?
- Payday loans often have extremely high APRs and must be repaid within weeks.
- Which has lower interest rates, payday loans or personal loans?
- Personal loans usually have lower APRs. As long as you pay off a payday loan in a couple of weeks, it could be the cheaper option, even if the annualized rate is much higher.
- Can I use either for a car repair?
- Yes. You can use payday and personal loans for just about any reason.
- How do they affect credit score?
- A payday loan usually has no effect on credit, since there isn't typically a credit check. It can affect your credit, of course, if you don't pay the loan and the debt gets sent to a collection agency.
- A personal loan can cause a slight dip when a lender pulls your credit report, but adding a new type of credit to your credit mix and making on-time payments can raise your credit score.
- Can I switch from one to the other later?
- You can't convert one to the other, but you can take out a personal loan to pay off a payday loan.
Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.
- Consumer Financial Protection Bureau (CFPB). "What is a payday loan?"
- Citi. 2024. "How Long Does It Take to Get a Personal Loan?"
- Freddie Mac. 2025. "Mortgage Rates Inch Down."
- TD Bank. "How Do Personal Loans Work?"
- Wells Fargo. 2025. "Personal Loans Application Checklist."
- MyFICO. "What's in My FICO® Scores?"
