When many find themselves in financial binds and need quick cash, they often turn to payday loans. These loans are quick and easy to obtain, and the funds are usually available the same day you apply.
Although payday loans are convenient, they have some important negatives to consider. A personal loan from TEG Federal Credit Union, in comparison, may be a better choice.
The following is an overview of payday loans vs. personal loans to help you weigh the pros and cons of both financing options so you can make an informed borrowing decision.
How Do Personal Loans Work?
Both banks and credit unions offer personal loans, and they are not as difficult to qualify for as you might think. How much you can borrow depends on the lender, but amounts from as little as $100 to as much as $10,000 are possible.
Personal loans can be used for many different purposes, and no collateral is required. The application process is also easy, and most lenders now give you the option of applying in person, online, or by phone.
Once you apply and are approved for a personal loan, some lenders will disburse the funds to you immediately, while others may take between 1-7 days. Personal loans have fixed interest rates, and you will repay the borrowed money with fixed monthly payments over several months or years.
The application process for personal loans is relatively simple. Information you may need to provide when applying includes:
- Proof of address
- Government-issued ID
- Proof of income and employment
When you apply for a personal loan, we will also do a credit check. If you don’t have a stellar credit score, it’s still worth applying. Instead of focusing solely on your credit score, lenders also look at other factors when considering you for a loan.
Personal Loans Pros and Cons
Personal loans have several important pros to consider. They are highly flexible and serve many different purposes. There are usually few or no restrictions on their use, and you may be able to borrow more with a personal loan than a payday loan.
Interest rates for personal loans are much lower than payday loans. Interest rates will vary depending on the lender but are usually between 6% and 36%, according to Experian data.
Personal loans also allow you to repay the money you borrow over several months or years. This helps with budgeting, and it also helps you keep your monthly payments low.
An important negative to consider with personal loans is that some lenders charge fees and penalties. A loan origination fee may be charged, for example, and a prepayment penalty may also be charged if you pay off your loan early.
How Do Payday Loans Work?
Payday loans are made with the promise to repay the full amount with interest the next time the borrower gets paid. The application process only takes a few minutes to complete.
When applying for a payday loan, you will be required to show:
- A recent pay stub
- Valid identification
- Bank account information
The amount you can borrow with a payday loan is usually between $50 and $1,000. If you are approved, you will receive the money immediately—there is no wait.
When you apply for a payday loan, you must submit a post-dated check for your next payday. The option may also allow you to withdraw money from your bank account.
If you are unable to repay a payday loan when the money is due, you may be able to ask the lender to extend the due date to the next payday. If the lender agrees, they will add additional fees and interest to the total. If the lender doesn’t agree, they will either process the post-dated check you submitted or automatically deduct the funds from your bank account. This action could result in an overdraft fee if you don’t have enough money to cover it.
Payday Loans Pros and Cons
The primary advantage of payday loans is that they are relatively easy to obtain. Having bad credit may not matter since we might not conduct a credit check.
A very important negative of payday loans to consider is their sky-high interest rates. They are so high, in fact, that many consider payday loans to be a form of predatory lending.
How high are the interest rates for payday loans?
According to CNBC, the average payday loan interest rate is 404%, and in some places, the rate can be over 600%. These extreme interest rates can cause a small amount of money to balloon into a large amount very quickly. Lenders can trap borrowers in a cycle of debt that may be difficult to escape.
Borrow Smart With a Personal Loan from TEG FCU
Payday loans charge exorbitant interest, making personal loans a better choice. Personal loans are affordable, offer longer repayment periods, and are easy to qualify for.
If you are considering applying for a loan, TEG Federal Credit Union offers personal loans with competitive interest rates, flexible loan terms, and there are no application fees or prepayment penalties. The application process is quick and easy, and you can do it either online or in person.
People often use personal loans to consolidate high-interest debts like credit cards, store cards, pawnshop, and payday loans. Considering a personal loan? The following article explains the process.
