3 reasons to get a personal loan over a payday loan

There will be times throughout your life when you are greatly in need of money. When time is of the essence, you might be wondering how you can get that money.

Even the most dedicated individuals who strictly follow their monthly budget might encounter an emergency or surprise one day. When money is needed, you have a few options: personal loans or payday loans.

However, you should stick to personal loans from your bank, such as Landmark Bank, because payday loans are rarely the best option. 

But first, what is a payday loan?

A payday loan, as defined by the Consumer Financial Protection Bureau, is a short-term loan for small amounts. You'll then have to pay them back when you next get a paycheck. Typically payments will be in a lump sum but interest-only payments are also an option.

In the event you don't have a viable savings account to pull money from during an emergency, payday loans can give you access to fast cash. But this comes with a catch: high interest rates.

"Interest rates on payday loans can be as high as 400 percent."

The CFPB stated that for every $100 you borrow, you can expect the cost of the loan to range anywhere from $10 to $30. This means interest rates on payday loans can be as high as 400 percent. Needless to say, these rates are much higher than what you'll find on your normal credit card.

Here are the following reasons why you should opt for a personal loan over a payday loan:

No. 1: You won't get stuck in a cycle

Individuals time and time again have told their stories about using payday loans, and how the fast cash was arguably worse than originally envisioned.

It's not uncommon for individuals who take out payday loans to get stuck in a cycle that causes them to utilize additional fast cash services in order to pay off old payday loans.

According to a study from the CFPB, approximately 80 percent of payday loans are followed by another loan within a two week period. Essentially, because interest rates are so high and other expenses take priority, individuals take out another payday loan in order to cover an old one. The cycle continues until everything is paid off.

With a personal loan, you're able to get a lump sum to put toward all of your outstanding debts. For example, it's not uncommon to take out a personal loan and use it to pay off outstanding credit card debt. So instead of making payments on three credit cards with varying interest rates, you only have to pay off the personal loan at perhaps a more favorable interest rate.

No. 2: Personal loans are cheaper

In the long run, personal loans will not cost you as much money because interest rates are more favorable. In fact, according to a study from NerdWallet, you can save hundreds of dollars in fees if you take out a $1,000 personal loan.

These loans can also help build your credit score. Where credit bureaus are concerned, personal loans are much more favorable than having to pay fees for the same loan amount over five years from a payday lender.

By taking out a personal loan, you won't get stuck in the damaging cycle that. Because of high interest rates payday loans force you to always take out new loans that will eventually build high levels of debt that are damaging to your finances and credit score.

No. 3: You'll know if you can pay it back

Payday loans might seem appealing because they offer fast cash without much of a background check. Lenders will not look at your ability to pay the loan back. Even if you need the money, you still have to take into consideration the amount and if you can realistically afford to pay off the loan.

With personal loans, banks will typically examine your financial history and decide if you're worthy to borrow the money. You never know, during this time of waiting you might come to the realization you don't actually need a loan. Instead, you might just focus on better budgeting habits.

Banks may also offer secured personal loans, which means you have to offer up something as collateral in case you can't make payments. Whether it's your house or car, having collateral may even lead to better agreement terms.

Even the best budgeters and savers can encounter rough times where money needs to be borrowed to pay of debt, hospital bills or anything else that pops up unexpectedly. In order to best preserve your financial health, you'll want to opt for taking out a personal loan from a trusted bank instead of gravitating toward a payday lender.

For more information about smart ways to manage your finances, contact Landmark Bank.

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