Why Bad Credit Personal Loans Are Better Than Payday Loans

Every year, more than 12 million Americans spend over $7 billion every year on payday loans at over 20,000 storefronts and hundreds of websites. Needless to say, payday loans are extremely popular. You can see why: 1) payday loans provide a fast and convenient source of cash, and 2) payday lenders don’t check your credit score. However, their outrageously high interest rates and short repayment terms outweigh their speed and convenience. In most cases, they push borrowers into a cycle of debt that leaves them worse than when they started. Personal loans are often ignored as a source of credit because borrowers expect them to be slow and have onerous eligibility requirements. Not true. Even for borrowers with poor credit, personal loans can be an affordable alternative to payday loans, title loans, and cash advance loans. Never considered a personal loan before? Here are five reasons you should give them a second look.

1. Personal Loans Have a Fixed Interest Rate

Although personal loan interest rates vary depending on how good your credit is, they have the advantage of fixed interest rates. Some loans, think home equity lines of credit and credit cards, change your interest rate depending on an underlying index rate, such as LIBOR or the Wall Street Journal prime interest rate.

A small change in your interest rate can quickly increase your monthly payments, which can mess up your budget in a heartbeat. With personal loans, once the loan agreement is signed, the interest rate does not change for the duration of the loan.

2. Personal Loans Don’t Require Collateral

While unsecured personal loans are not always the cheapest option, they are the safest, at least from the borrower’s perspective. For example, with an auto title loan, you are transferring ownership of your vehicle to the lender until the loan is repaid. In the case of pawn shops, you don’t only transfer ownership but also the possession of the security until you repay the loan.

Personal loans, on the other hand, do not require collateral or security. If you fail to repay, the lender will report you to the credit reporting bureaus. However, your bank accounts will not be levied, and you won’t lose your car.

3. Personal Loans Have Fixed Installments And A Set End Date

Unlike credit cards and payday loans, personal loans have fixed payments and a set end date on which the loan is paid. This makes it much easier to stick to a monthly budget. With credit cards, the monthly minimum payment may change depending on the balance on your card; and because it’s so easy to withdraw more and more money until you reach the card’s limit.

Payday loans manage to combine the worst of both worlds by requiring a lump sum payment within a short period, usually two weeks; and then offering what amounts to an open line of credit to those who can’t afford to repay the initial loan. On average, people who use payday loans are indebted five months of the year, take out eight loans of $375 each and spend $520 on interest.

4. Personal Loans Offer Better Interest Rates

Although the interest rates of personal loans vary depending on the lender and the credit history of the borrower, they are cheaper than payday loans. This is not always obvious because of the way payday lenders market their loans. Let’s say you borrow $350, pay the $50 fee, and manage to repay the $350 by the end of the two weeks period. The annualized interest rate will be 372.45%, more than double the APR of most personal loans. Keep in mind that most borrowers are stuck paying for a payday loan for much longer than two weeks, which can quickly push the APR rate of payday loans into four figures. Different personal loans come with different rates, but you can check out the pros and cons of each to ensure that you choose the best personal loan for you.

5. Personal Loans Can Help Rebuild Your Credit History

Payday lenders don’t report your payments to the three national credit bureaus: TransUnion, Experian, and Equifax. Many personal loan providers, on the other hand, do report to one or more bureaus. If you make regular and on time payments on your personal loan, it can help improve your credit score. Paying off your payday or title loans will not help rebuild your credit history.

Think your credit is not good enough to qualify for a personal loan? You may be surprised. Not all personal loans require excellent or even good credit. Personal loans are a flexible credit option available for borrowers with all types of credit scores. Although prime lenders, such as LendingClub and SoFi, do require excellent credit scores, other lenders, such as Avant, have much more forgiving eligibility requirements and still report to credit bureaus. Not sure where to start? Find the best rates available for your credit score using SuperMoney’s personal loan search filters.

Are personal loans always the best loan for you? No. Your personal circumstances and preferences determine what is the best choice for you. However, personal loans can offer people who have suffered financial setbacks in the past an affordable source of credit and a way to rebuild their credit score.