How much are interest rates?
Payday loans: Perhaps the biggest potential downside of payday loans is their steep interest rates. For a two-week loan, a $15 fee per $100 is equivalent to an annual percentage rate (APR) of nearly 400%. Plus, there is the addition of late fees to the amount borrowed if you fail to repay the loan in full. You can see how quickly the total interest charges can add up.
Personal loans: Depending on your credit score, personal loans may offer relatively low interest rates. For borrowers with a strong credit history, Discover Personal Loans offers a fixed interest rate from 7.99% to 24.99%. A lower fixed rate, combined with no origination fees, may make personal loans appealing for borrowers.
How flexible are the repayment terms?
Payday loans: Payday loans are specifically designed for short-term use. These loans are typically due at the time of your next paycheck. Failing to repay the loan within that term could result in extra fees and the amount of interest charged. Some payday lenders allow borrowers to roll over a loan for an additional fee.
Personal loans: Personal loans take longer to pay back than payday loans, but they give you a flexible repayment schedule based on your unique financial situation. With many lenders, you can choose from a range of repayment terms so that you can repay your loan in a way that fits your needs. For example, if you get approved for a $15,000 Discover personal loan at 12.99% APR for a term of 72 months, you’ll pay just $301 per month.
But you could structure your loan in a different way, depending on your needs. If your cash flow is limited, for instance, a loan with a longer time frame might be a good fit for your budget because it could lower your monthly payments.
Keep in mind that the longer your repayment takes, the more total interest you will pay over the life of the loan. Or you might choose a loan with a shorter time frame if you want to save money on interest, even though it will likely have higher monthly payments. These flexible repayment terms might give you more control over your budget and a more realistic framework for paying off your loan.
What is the difference between types of lenders?
Payday loans: Payday lenders can help borrowers in case of an emergency. These short-term loans may not require a credit check and could be a financial stopgap for lower-income Americans . But consumers who lack the means to pay back the loan may find themselves in a difficult cycle of unpaid loans and compounding interest rates.
Personal loans: Long-term personal loans are designed as flexible solutions to your financial needs, such as debt consolidation. That’s why they are offered by some of the most recognizable brands in the industry, including Discover. When applying for a personal loan, be sure to read all the fine print. If the lender includes origination fees or closing costs, it might be good to look at other options.
The bottom line
Both personal loans and payday loans can be used for financial emergencies. But payday loans may lead to a damaging cycle that makes it difficult for borrowers to catch up because of expensive fees or higher interest rates. In contrast, personal loans can offer borrowers a long-term solution that may be easier to manage responsibly. And it can be quick: With Discover Personal Loans, for example, your money can be sent as soon as the next business day after acceptance.*
In fact, Discover Personal Loans gives applicants a same-day decision in most cases. See if you qualify and get started.