What Makes Payday Loans Different from Personal Loans?

A payday loan is a form of short-term borrowing, which is incredibly easy to apply for. They’re unsecured loans since they require no collateral. Lenders of this nature usually extend credit with high interest, using the borrower’s income as basis. The principal? A chunk off the borrower’s next paycheck.

According to a 2012 report by the Consumer Financial Protection Bureau (CFPB), 80% of payday loans get renewed.

There’s usually a lot of caution that has to be taken when taking out payday loans. Many people have a tendency to confuse or interchange payday loans with personal loans. Those are actually two rather different things.

Payday Loans vs. Personal Loans

While there are some similarities between payday loans and personal loans, they also differ in a number of ways. Payday loans tend to be smaller amounts of money borrowed until the borrower’s next paycheck, while personal loans are often larger amounts borrowed for longer periods of time.

Personal loans can be arranged without collateral, while payday loans will either require the borrower to use property as collateral or will charge high fees. Personal loans generally carry lower interest rates than payday loans and also have hidden fees. Although payday loans are considered predatory lending, personal loans often provide a legitimate source of funds.

There’s actually a much broader category where personal loans are involved. Banks, credit unions, and online loan companies generally offer personal loans. This is why they’re often referred to as signature loans and bank loans alike. A small loan company can be a good choice if the borrower has a relatively low income and own some sort of security, such as a car or house, that can be used to secure the loan.

It will be upon the borrower to provide proof that they can eventually repay the loan, which is an advantage in comparison to payday loans. The loan can be used for a number of purposes such as to consolidate credit card debts, pay for college tuition, or make home improvements.

Personal Loans

The borrower will have to complete an application that will be reviewed by the lender. If the application is approved, they will then give out the loan terms. These are the terms under which the borrower can accept or reject the loan. That would be the time to review them and speak to a representative before finalizing the paperwork.

The loan will be funded once the paperwork is fully accomplished. At that point, the borrower will be paid out the funds. It can either get issued by check or through a direct deposit. They can come either secured on secured. The latter require collateral of some type as a borrowing condition. Cash assets, like a certificate of deposit (CD) or savings account will serve the purpose.


Payday loans and personal loans are often mistaken as being the same or, at least, interchangeable. They’re actually two different things: payday loans are unsecured, short-term loans with high interest. Personal loans are secure, on the other hand, often issued by a bank or similar entity.

Trying to find personal loans for bad credit in Bessemer, AL? Drop Bessemer Finance Company a line today! We have a variety of personal loan sizes to meet a wide range of client needs.

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