Personal Loans

Personal Loans vs. Cash Advance Loans: Help Me Choose

Discover the differences between personal loans vs. cash advance loans and how to choose the right one for your circumstances.
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By Gina Freeman
Posted on: July 30th, 2021

Personal loans vs. cash advance (aka payday) loans may appear similar at first look. In fact, some cash advance lenders advertise their products as “personal loans with no credit check,” which can confuse borrowers. However, there are some significant differences between the two products — you should understand personal loans vs. cash advance loans before borrowing.

People tend to take out cash advance loans for financial emergencies because they can be obtained quickly or because the borrowers don’t qualify for any other kind of financing. But personal loans are suitable for many uses.

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Personal Loan for Debt Consolidation

One of the most popular uses for personal loans is debt consolidation. You can pay off credit card debt with a personal loan and know exactly when you’ll be debt-free (as long as you stop carrying balances on your cards). Interest rates average 7% lower than those of comparable credit cards, and they are usually fixed. And replacing revolving debt like credit card balances with installment debt like a personal loan can improve your credit score quickly.

Personal Loan to Start a Business

Personal loans offer real advantages if you’re starting a business. Business loans from the SBA or banks often require a lot of paperwork and can take a long time to process. In addition, their interest rates can be high. But a qualified applicant can get a personal loan of up to $100,000 in a matter of days. And if you have excellent credit, your interest rate compares favorably with that of a home equity loan.

Personal Loan for Medical Costs

If you need expensive medical treatment, most providers want you to pay for at least part of the treatment in advance. It often doesn’t matter if delaying treatment while you find the money is painful or worsens your condition. You can even use a personal loan for medical tourism to save money on your treatment, for a pet’s veterinary care, or for cosmetic surgery.

Personal Loan for a Tiny House

Most “alternative” housing doesn’t qualify for mortgage financing. And that includes tiny homes. That’s too bad because tiny houses can be very economical to build, buy and own — if you can finance them. Because personal loans require no collateral, it doesn’t matter what you choose to buy with them. So it doesn’t matter if your home is technically real estate or not.

Personal Loan for Home Remodel

Personal loans can be ideal for home renovations large and small. You don’t need home equity to get a personal loan. And if your project is smaller, why would you want to pay the home appraisal fee, title charges, and other mortgage processing costs when you can get a personal loan quickly and cheaply?

How Are Personal Loans vs. Cash Advance Loans the Same or Different?

It’s important to understand the similarities and differences between personal loans and cash advance loans in order to make the best decision for your own situation. From how to apply to how much you’ll pay in interest, here are some of the main differences between personal loans and cash advances.

How to apply

You can apply for a cash advance loan in minutes online or in-person at many storefront locations. You’ll need to supply your social security number, a residential address, proof of employment, and your bank account information. Most cash advance lenders determine how much they’ll lend you in minutes. If you accept their terms, you write them a post-dated check for the loan amount plus the fees, and they cash it at the end of your loan term. Alternatively, you authorize the lender to withdraw the loan balance plus fees directly from your checking account.

With a personal loan, you complete a more detailed application online or in-person and authorize the lender to pull your credit report. Personal loan providers electronically underwrite your application and may issue a preliminary approval immediately. But it usually takes a few days for an underwriter to verify your employment, income, and other information before they release your money.

Collateral

Personal loans and cash advance loans are both unsecured loans, which means no property (collateral) is involved. If you fail to repay a secured auto loan, the lender can repossess your car. But with unsecured loans, the lender has only your promise to repay.

You may be able to get a lower interest rate by choosing a secured personal loan and pledging an asset as collateral. Just as you might get a better deal on a fast loan with no credit check if you put up your auto title or take some jewelry to a pawn shop.

Interest rates

Personal loan interest rates start at under 4% for short-term loans to people with excellent credit and go as high as 36% in most states.

Cash advance loans don’t charge interest. However, the loan fees can be extreme. For instance, it typically costs $15 to $20 to borrow $100 for two weeks. That may not sound like much, but that’s 365% to 487% on a yearly basis! According to the Center for Responsible Lending, the average payday borrower rolls over their loan about eight times. If you borrow $100 and roll it over eight times, you’ll be paying the lender $120 to $160 in interest to borrow $100 for less than four months.

In contrast, if you borrow $1,000 at 10% for one year with a personal loan, it will cost you just $55 in interest.

Impact on credit

Personal loan providers report your payment history to credit bureaus. If you make your payments on time, that history can improve your credit scores. If you pay late, that also impacts your credit scores — and not in a good way. One missed payment, according to FICO, can drop your credit score up to 180 points.

Cash advance loans don’t generally impact your credit score because payday loans are not reported to credit bureaus. The real damage comes from the trap that cash advance loans can create, making you more likely to miss payments to other lenders.

Eligibility

Personal loans have more stringent eligibility criteria than payday loans. Your credit score must exceed the lender’s minimum, which can range from about 580 to over 700. Your income must be reliable, and your debt-to-income (DTI) ratio can’t exceed the lender’s maximum levels. Maximum DTIs typically run between 36% and 50%.

Lenders calculate your DTI by dividing your total payments for mortgage or rent and all of your other debts (auto loans, credit card minimums, student loans, etc.), plus your new loan payment by your gross (before tax) income.

For instance, if your income is $4,000 per month, and you pay $1,200 a month for rent, $300 per month for a car loan, $200 for credit cards, and the loan you want has a $300 monthly payment, that’s $2,000 in payments divided by $4,000 in income. $2,000 / $4,000 = .5 or 50%.

How to Choose Between Personal Loans vs. Cash Advance Loans

Personal loans are almost always a cheaper and better option than a cash advance loan. However, there are times when you might have to take out a cash advance instead of a personal loan.

When personal loans are better

A personal loan is a good solution if your credit and income are solid enough to qualify and you don’t need the money for a few days. Personal loans have minimum loan amounts, usually $1,000, and minimum loan terms (usually, one year).

When cash advance loans are better

There are times when a cash advance loan might work better than a personal loan. If you only need a fast $100 for a couple of weeks, it might be silly to borrow $1,000 for a year. And in an emergency — say you need bail money or life-saving surgery for your favorite dog, time may be the most critical factor.

You could always use a personal loan to pay off the payday loan and give yourself a little breathing room instead of rolling the cash advance over again and again.

FAQs: Personal Loans vs. Cash Advance Loans

Is there such a thing as a personal loan with no credit check?

Not really. That’s a confusing term that payday and auto title lenders sometimes use for cash advance loans and title loans. If there’s no credit check, it’s not a personal loan.

Are there personal loans for bad credit?

Some lenders do cater to borrowers with lower credit scores. But you’ll have to apply and authorize a credit check, and your DTI must meet the lender’s guidelines. Personal loans for people with poor credit come with higher interest rates, up to 36% or even higher in some states. You may be able to improve your chances for loan approval or get better terms with a secured personal loan or by getting a co-signer.

Are there alternatives to cash advance loans?

One option for smaller amounts is the neobank or an app like Dave. Many neobanks don’t require a credit check to open an account and offer free overdraft protection. The Dave app has a membership fee of $1 per month and provides interest-free loans until payday.

About the Author

Gina Freeman writes about personal finance and has been featured on AmOne, The Mortgage Reports, MSNMoney, Fox Business, Forbes, The Motley Fool, and other fine websites. Her background includes tax accounting with Deloitte, over 20 years in mortgage sales and underwriting, systems consulting for Experian, and several years in bankruptcy law. Gina enjoys helping consumers make confident and intelligent financial decisions.