Is a payday advance from a bank better than a personal loan?
Many of us have been there. You had a car accident, and now you have to pay the mechanic to fix it. This unexpected expense will cost you a few hundred dollars and, like 60% of Americans, you won’t be able to cover it with your savings. Plus, you only have money for the bare necessities left in your checking account, and your next payday is days away. What should you do?
You have a few options in this situation. Read on to learn more about bank payday advances versus personal loans, and how to decide which is right for you.
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What is a salary advance?
A payday advance loan from a bank or credit union is called a small amount loan. These are loans generally between $100 and $1,000 granted by a bank to account holders. The intention is to give consumers an alternative to predatory payday loans (see below) when they are in a financial bind. If your bank offers them, you’ll get the money you need quickly and pay it back from your next paycheck via direct deposit, or over a period of weeks or months. You will have to pay a fee (either a fixed dollar amount or a small percentage of what you borrow) and interest for the service.
You may soon hear more about payday advances; a Bloomberg Law report in early October 2022 noted that federal regulators want banks to be able to offer them, but banks need more guidance from regulatory agencies moving forward. Personal loans, on the other hand, are already reliably available for your emergency borrowing needs.
What is a personal loan?
A personal loan is a fairly easy way to borrow a lump sum of money. They usually come with lower interest rates than many other quick cash solutions, like credit cards or payday loans (and certainly lower than payday loans). However, if your credit isn’t in top shape, you may not qualify for the best personal loan rates available.
Personal loans are generally in the amount of $1,000 to $100,000, and can often be funded fairly quickly after your application is approved. In some cases, you can get the money the same day or the next day. Is there another way to borrow money fast? Yes, but you probably want to stay away.
Try to avoid payday loans
Although it may seem counterintuitive (after all, there’s “payday” in the name), it’s a good idea to avoid payday loans. And depending on where you live, they may be illegal in your area; they have been banned in 13 states and the District of Columbia. Payday loans are small, short-term loans of $500 or less, usually with a very high interest rate.
As of 2022, typical payday loan rates range from 28% to 1,950%. These loans often lead consumers into a cycle of debt from which they cannot easily escape. Can’t repay your loan on your next payday? That’s fine, the lender will turn it into a new payday loan for you! How nice of them. Your best choice is probably a payday loan or a personal loan.
How do you choose?
There are a few things to consider when choosing between a payday advance and a personal loan.
How much money do you need?
A payday advance loan, if you can get one from your bank or credit union, is probably best for borrowing smaller amounts. If your auto repair bill is $350, but the smallest personal loan amount you can take out is $1,000, that’s not ideal. If your surprise expense is larger, you’ll likely get a better interest rate with a personal loan (plus, payday loans from your bank may be capped at $500).
How fast do you need it?
If you can wait a few days and have good credit, you may be better off with a personal loan – again, because of interest rates. That said, if your bank offers payday advance loans, they might approve you fairly quickly if you’re an existing customer in good standing. It has already registered you and can access your finances in the form of your bank account(s). Plus, your bank can easily send the money you borrow directly to your account.
How long do you need to pay it back?
This is where a personal loan probably has the advantage. You will have more time to repay a personal loan (months to years) than a payday loan (weeks to months). But again, a lot depends on the amount of money you need to borrow.
Payday advance loans and personal loans have their place, and if you ever get into trouble and need to borrow a relatively small amount of money, both are worth considering. However, it is definitely in your best interest to avoid payday loans.
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