The Difference Between Payday Loans and Bank Loans

If you need money, there are a lot of ways to go about getting it. However, most people just default to a bank (or like me – 401K loan,) because they are used to standard bank lending products like car loans and mortgages. However, there are loans for just about every type of situation, and it is important to know the similarities and differences. Here is what you need to know about the difference between banks loans and payday loans.

Payday Loans

Let’s start with payday loans because less people are familiar with what these have to offer. A payday loan is a short term, unsecured loan, that is typically in a small amount. The term unsecured means that there is no collateral required for the loan. You may think that the collateral is the borrower’s paycheck, but in fact that is not the case, since there is no legal recourse immediately available to garnish wages should the borrower not pay.

Payday loans are designed to be short term loans, for example www.paydayloansonline.com. These loans have pretty normal interest rates if used during just the loan duration. For example, a common interest rate may be 15% for a two week loan. That doesn’t seem too bad, but critics warn that the annual percentage rate is really 390%. But once again, the loans are only for two weeks, not one year, so that large rate doesn’t really apply.

The great thing about payday loans is that the lenders don’t restrict on what the borrowed funds can be used for. This flexibility makes them a popular choice among borrowers. However, the amounts of payday loans are typically small – usually less than $500. This can put constraints on what you can use the money for.

Bank Loans

Bank loans, on the other hand, are usually for longer terms and larger amounts of money than a payday loan. Banks also usually structure their lending terms very similar to other banks, so most consumers are aware of the different lending options. For example, most consumers know what a car loan and mortgage loan entails. These loans are typically made in the $1,000s of dollars, with multi-year terms associated with them. Some banks also offer personal loans and small business loans, which are designed to cater to other needs, but once again, the amounts are typically large, and the time frames are usually in the years.

In the last few years, several banks across the United States have started issuing small or micro loans similar to payday lenders. In a partnership with the FDIC, these loans were structured similar to payday loans, but offered through traditional banks. The goal is to bring products consumers want (such as payday loans) to the mainstream market. This can also minimize the risk to the lender, especially if there is a pre-existing banking relationship prior to the loan being issued. This facilitates a much easier transaction for both the lender and the borrower.

As you can see, there are several differences between payday loans and what traditional banks issue.

9 thoughts on “The Difference Between Payday Loans and Bank Loans

  1. Mike @ MoneyFud

    I agree with Maria, payday loan lenders are just legalised loan sharks! There is talk here in the UK to legally caps the APR as some can be as high as 16,000% – that’s no typo!

    Reply
  2. femmefrugality

    I don’t think I’d ever do a payday loan…if I needed the $500, I’d just wait till my paycheck came in or take a hit with a late fee which would probably be less than the interest.

    Reply
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