Personal Loan v PayDay Loan – Where’s Your Money?

Posted on February 02, 2016 by Guy Atkinson

The expansion of the UK’s credit market has presented us with a myriad of choices when it comes to taking out a loan. Short-term loans, borrowing which you pay off over a longer period and a multitude of interest rates and other administration fees can make it a confusing choice.


If you are looking for something more short-term, however, the choice usually boils down to one of two options: a personal loan or a payday loan. Both have their advantages and disadvantages and deciding on the right one will generally come down to what your personal circumstances are, how long you need to repay the loan plus interest and whether you want to be able to factor repayments into your household budget over a specific period.

Personal loans

A personal loan offered for a short-term period will usually come with a set interest rate and a longer repayment schedule. That means that you’ll be repaying over a longer timescale than with a payday loan and that the headline interest rate – the APR – will be lower.

Personal loans usually require the lender to carry out a credit check into the applicant and so there is a higher likelihood that the application will be rejected if the borrower has a poor financial record or other indicators that the lender would regard as red flags. That said, many personal loans are available to people with lower credit ratings or those with special circumstances.

Personal loans are available for sums from £1,000 to £10,000 with some lenders offering even higher amounts up to £25,000. Repayment periods vary – the shortest is usually 12 months with the longest stretching out to 10 years.

Most lenders will not be too concerned about what you plan to use the money for and will accept applications from both homeowners and tenants.

One thing worth remembering about personal loan applications is that they can affect your ability to get credit in the future. Every time you apply for a loan, a search is recorded against your credit record. Too many of these might indicate to a lender that you are in financial difficulty and make it less likely that an application is accepted. So, if you are considering applying for a personal loan, it’s worth doing your research and shopping around before jumping in and firing off multiple applications. Also worth considering are the pre-eligibility checks – so-called ‘soft searches’ – which some lenders provide and allow an applicant to find out if they are likely to be accepted for a particular product without a search being registered on their credit record.

Payday loans

These are generally very short-term loans that come with much higher headline APRs and much shorter repayment periods. As the name suggest, a payday loan is designed to tide a borrower over until the next payday when the loan should either be repaid or rolled over until the following month.

Payday loans are available for amounts between £100 and £1,000. They are a quick and relatively simple way to borrow money for the short term if you are confident that you will be able to repay the capital sum plus interest when the repayment is due.

Traditionally used by people who are between jobs or otherwise cash strapped, they have received a lot of negative publicity in recent years based upon the high headline interest rates and the number of rollovers that borrowers have been allowed. That situation has now changed with new rules restricting the amount of charges that a lender can levy and the number of times that a borrower can roll a loan over cut to three.

While the headline APRs with payday loans may appear to be very high, this figure has to be advertised by lenders for all types of loans. It stands for annualised percentage rate and is not as relevant with payday loans as with those that have to be repaid over the course of 12 months or more. While an advertisement for a payday loan may show an APR of in excess of 1,000%, nobody who borrows this amount will actually end up paying that much because a payday loan is so short term. For instance, if you borrow £250 for one month at an APR of around 1,400%, then you will only repay £250 – total interest of 25% – a much smaller amount than the headline might imply.

While most applications for payday loans are credit checked, this is generally less prescriptive than with personal loans. A payday lender will want to know about your job or other source of income and will usually be happy with applications from borrowers with previous defaults or county court judgements (CCJs) on their records. Those who have recently been made bankrupt may, however, struggle to get accepted for a payday loan.

Which one is right for me?

This depends entirely upon your circumstances. If you need to borrow a relatively small amount – say, £300 – and are confident that you will be able to repay it in a month or two, then you will pay a much lower amount of total interest with a payday loan than if you had applied for a larger personal loan. Despite negative publicity, payday loans remain a viable alternative for people who are able to commit to repaying the loan plus interest on the first possible date specified in the credit agreement.

If you are not in that position and want longer to repay, don’t mind so much about the total interest bill that you will end up owing and want to be able to budget over the longer term, then a personal loan may be your best option. Remember, though, that the lending criteria for this type of credit may be stricter than with payday loans.

Article provided by Mike James, an independent content writer working in the financial sector – alongside a selection of companies including tech-led finance broker Solution Loans, who were consulted over the information contained in this piece.

Tip of the Day

Time management for Finance Professionals

time management


I’ve just re-read Richard Denny’s fantastic book ‘Selling to Win’, in which he mentions a time management technique that I learnt many, many years ago from an old boss of mine.


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