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Personal loans vs payday loans: Which is right for you?
Need to borrow around $1,000? Find out if you should get a personal loan or a payday loan.
There’s a wide range of loan options available to those who want to borrow money. Each type of loan is suited to a different type of borrower and can be used for different purposes – this includes personal loans and payday loans.
In this guide, we break down the key differences between personal and payday loans, outline their costs and help you determine which will be the best loan for you.
Three main differences between personal and payday loans
|Payday loans||Personal loans|
|Amount||Can be as low as $100 or as large as $1,500||Usually between $1,000 and $35,000|
|Collateral required||None||Can be secured or unsecured|
|Costs||Fixed cost (between $15 to $60 in fees per $100 borrowed) based on your province or territory of residence||Interest rates range from 3% for excellent credit to as high as 36% for poor credit|
Compare personal loans vs. payday loans
Check the websites of any lenders you’re interested in to confirm they operate in your province of residence.
⚠️ Warning: Be cautious with payday loansPayday loans are expensive. If you're experiencing financial hardship and would like to speak to someone for free financial counselling, you can call Credit Counselling Canada from 8:00am to 5:00pm Monday to Friday at +1 866-398-5999. Consider alternatives before applying for a payday loan:
- Local resources. Government agencies, nonprofits and local charities may offer free financial services and help with food, utilities and rent for those in need.
- Debt relief companies. These services can help you find a solution to reduce your debt payments and work toward becoming debt-free.
- Payment extensions. Talk with your bill providers about a longer payment plan or extension on your due date if you're behind on payments.
- Side jobs. Today's digital marketplace offers the ability to more easily sell unwanted items, sign up for food delivery or drive for rideshare services.
Maximum borrowing costsYou should always refer to your loan agreement for exact repayment amounts and costs as they may vary from our results. The table below shows the maximum allowable cost of borrowing under a payday loan for each province:
|Province||Maximum allowable cost of borrowing|
|Alberta||$15 per $100 borrowed|
|British Columbia||$15 per $100 borrowed|
|Manitoba||$17 per $100 borrowed|
|New Brunswick||$15 per $100 borrowed|
|Newfoundland and Labrador||$21 per $100 borrowed|
|Northwest Territories, Nunavut & the Yukon||$60 per $100 borrowed|
|Nova Scotia||$19 per $100 borrowed|
|Ontario||$15 per $100 borrowed|
|Prince Edward Island||$25 per $100 borrowed|
|Quebec||Limit of 35% annual interest rate (AIR)|
|Saskatchewan||$17 per $100 borrowed|
What’s the difference between personal and payday loans?
There are several key differences between personal loans and payday loans including:
- Loan amount. You can usually borrow anywhere from $50 up to $1,500 with a payday loan. Personal loans come with much higher maximum loan amounts that can be as high as $35,000, sometimes higher.
- Eligibility. Personal loans offered by banks and credit unions have strict eligibility criteria that often include having a good credit score and a regular income. Lenders that offer payday loans are much more flexible and will consider those with bad credit, those who receive government benefits as income or people who are unemployed. Payday lenders are more concerned about your ability to make your repayments.
- Lenders. Personal loans are offered by banks, credit unions and online direct lenders. Payday loans tend to be offered by online lenders specializing in only that type of product. Some lenders who offer payday loans have physical stores.
- Cost. Personal loans will be cheaper overall, but you’ll have to have good to excellent credit in order to be approved. While payday loans have a quick approval process and can grant funds faster, you’ll undoubtedly pay for this convenience. Payday loans are known for their extremely high interest rates.
- Loan term. Payday loans come with much shorter terms, usually between 7 to 31 days, however it can sometimes be longer depending on the loan amount and the lender. Personal loans, on the other hand, usually come with a minimum loan term of one year and a maximum of between five to ten years.
What’s the cost difference between a personal loan and a payday loan?
Personal loans don’t usually come with annual percentage rates (APRs) higher than 36%. On the other hand, payday loans can come with APRs of 400% or higher. It’s important to note that the annual percentage rate calculates yearly cost. If you decide to get a payday loan and repay it in one month, the actual dollar amount you pay on top of what you borrow may be a better representation of costs.
The amount of interest you pay on a personal loan may be based on your credit history, whether you’re offering an asset as collateral or not, the term length of the loan and other factors.
Payday loan costs vary between provinces and territories and specific lenders, but are often a high-cost financing option that lets you borrow money almost immediately with little to no credit check.
Payday loan costs
- For every $100 borrowed, a payday loan usually costs between $15 to $25 (depending on the province you live in), or up to $60 if you live in one of the three territories.
- For every $100 borrowed, the cost of an installment loan repaid over a few months is around $15.
- Payday loan terms are usually between 7 to 31 days and can have APRs ranging from 400% to over 1,000%.
Personal loan costs
- Unsecured personal loan interest rates will generally be a bit higher than their secured loan counterparts because there is no asset attached to the loan as security. For a $2,000 loan with an 8% APR, you could expect to pay a little over $250 in interest alone.
- Peer-to-peer loans tend to come with comparable interest rates that are based on your credit score. Rates can be as low as 5% or as high as 36%.
Payday loans are available in all provinces and territories across Canada. You should be aware that payday loans are regulated by individual provinces, which means costs and fees can vary. Ensure that any lender you choose abides by the laws of the place you live.
At the time of writing in October 2019, the Yukon, Nunavut and the Northwest Territories do not have legislation regulating payday loans at the territorial level. Payday loans are regulated in these territories at the federal level only.
How can I decide which type of loan is right for me?
While there are similarities between personal and payday loans, there are big differences as well. Asking yourself the following questions will help you decide which type of loan may be right for you:
- How much money do I need to borrow?
If you need to borrow between $50 and $1,000, a payday loan is better suited for you, as personal loans tend to have minimums between $1,000 to $2,000.
- How fast do I need the money?
Payday loans usually have faster turnaround times than personal loans because less is involved in the approval process and the lenders have much less stringent eligibility criteria. If you need money by tomorrow, a payday loan could be a better fit.
- How is my credit history?
If you have good to excellent credit and regular income, you could stand to save money by getting a low-interest personal loan rather than a high-cost payday loan. If you have poor credit, you may fare better with a payday loan.
- How much will it cost me?
Ultimately, it comes down to your monthly repayments and the total amount you borrow. Be sure to compare multiple loan options and explore what’s most affordable for your needs.
How does a personal loan and a payday loan affect my credit score?
Payday lenders usually don’t send your loan information to a credit bureau. However, if you make late repayments, they will likely report you to one of the bureaux.
Personal loan lenders will usually report your information to a credit bureau.
For both personal and payday loans, the most important thing to do is make your repayments on time. If you don’t, your credit score will be negatively affected.
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