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Payday loans vs. Personal loans

Unexpected bills always seem to strike when they are least welcome. Sometimes, even the most carefully planned can't cover emergency costs that need paying, leaving you with serious financial issues.

What's more, around 40% of the UK's population have no savings set aside at all, while 30% said they have savings of less than their monthly salary, according to a survey by Paymentsense. So, what are you supposed to do when emergency costs need to be paid and you can't cover them?

There are a few options: using a credit card, applying to the bank for a loan, or borrowing the money from a friend or relative, to name a few. However, it's not always possible to go down these routes to find quick funds, and more short-term lending options need to be looked at instead.

Both payday and unsecured personal loans are two options available to people looking to borrow quickly to cover short-term costs, but there are important differences between them. Take a look at the table below for a quick comparison, then we'll answer some of your most frequently asked questions about these loans.

Note: If you're looking to balance the books and begin saving, read our guide to creating and sticking to a budget, which is full of great advice.

 

Unsecured personal loan

Payday loan

How quickly can you apply?

In minutes, with the right lender.

In minutes.

Who is eligible?

Anyone who meets the eligibility criteria and can pass a credit check.

Anyone who meets the eligibility criteria.

How much can you borrow?

From small amounts to £25,000 and more.

Usually up to £500.

How much interest?

Varies from loan to loan, usually not more than 1,000% APR.

Often over 1,000% APR.

When do you pay it back?

In monthly instalments over a period via a repayment plan.

On your next payday.

How is payment taken?

Direct debit payment each month.

Taken from your account via CPA.

Effect on credit score?

Positive if paid on time. Negative if you miss repayments.

Positive if paid on time, but can also be negative as some lenders can be put off if you want to apply for credit later. Negative if not paid on time.

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What is an unsecured personal loan?

An unsecured personal loan is a loan that is taken out without any security on your assets. They can be used to borrow larger amounts than payday loans and can be paid back over many months, rather than within a few days or weeks. The amount you can borrow varies from lender to lender, but you can find options that range from under £1,000 to sums of £25,000 and more. Unlike a payday loan, they are designed to be longer-term loans that offer more manageable and flexible payment options.

 

How does an unsecured personal loan work?

Unsecured personal loans work simply: you apply for a loan of a certain amount with a lender, pass their eligibility check, then agree a repayment schedule tailored to you. Once you've received the money, you'll begin paying the loan amount plus interest back in monthly instalments via direct debit. This is unlike a payday loan, which requires the full amount to be paid on the agreed date via CPA, which you cannot cancel.

It can take slightly longer to arrange loans if you're looking to borrow a large amount or if you're applying with a bank. However, with the right lender, applying for an unsecured personal loan can be as easy and quick as taking out a payday loan, provided you pass their credit check, so they are a great option for covering your emergency expenses.

 

What is the interest on an unsecured personal loan?

The interest rates on a personal loan can vary from lender to lender, but they tend to be lower than a payday loan. The rates and APR on a personal loan are often fixed, making it much easier to plan ahead financially without any changes to what you pay each month.

 

What do you need to take out an unsecured personal loan?

Many banks require you to be over 21 to take out a personal loan, but other lenders provide loans to those over 18. You must be a UK resident, have a stable income, and a bank account that accepts direct debits for payments. You will need various proofs of identity and income, but it's best to check with your lender to find out which ones.

You will be required to pass a credit check before being approved. The reason for this is that they aren't secured against any of your assets, like property or a car, so lenders need to make sure you are able to repay the amount borrowed.

 

Do personal loans show on your credit report?

Yes, an unsecured personal loan will show on your credit report.  It is likely to remain on your records for 6 years after repayment.

 

Do personal loans affect your credit rating?

As long as you pay them back on or ahead of time, unsecured personal loans will help to boost your credit score by demonstrating you are a trustworthy person to lend money to. However, if you begin to miss payments or pay late, they can affect your credit rating negatively.

 

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What is a payday loan?

A payday loan does exactly what its name suggests: provides you with a small amount of money to be paid back when your next wage comes in. Most lenders will only allow you to borrow up to £500 over a period of up to a month, which is why they are also known as short-term loans.

This type of loan is intended to be used to pay for expenses in the short-term, making them unsuitable if you want to borrow a lot of money or repay over a longer period of time.

 

How do payday loans work?

A payday loan is simple to arrange, with many websites offering quick application and immediate payment into your bank account. As part of the application, a repayment date will be set and on that day an automatic payment of the full borrowed amount plus interest will be taken from the account the money was originally paid into. This is done via Continuous Payment Authority (CPA), a type of payment that gives a company permission to take cash from your account whenever they think they are owed. If you aren't able to pay on the agreed date, you will be charged a very high interest rate that can see your debt increase heavily.

 

What is the interest on a payday loan?

Interest on a payday loan can be more than any other type of loan, including personal loans, with many leading providers charging upwards of 1,000% APR. There are often even higher rates applied if you are unable to repay on the agreed date, when you are billed automatically. This means that if you can't pay in full, your debt can quickly spiral out of control. A payday loan should only be taken out if you are certain you will have the full amount plus interest on the day of repayment.

 

What do you need to get a payday loan?

Most payday loan providers only require that you are over 18, have a bank account and debit card, live in the UK, and have a mobile phone and email address. They don't carry out a credit check when you apply, which can make them an appealing option if you have been turned down for a loan elsewhere. However, their willingness to lend to those with a poor credit reason is the main reason incredibly high interest and APR is charged.

 

Do payday loans show on your credit report?

This depends on whether your lender shares customer records with credit report agencies. If they do, then yes, your payday loan will show on a report from one of these companies. A payday loan will remain on your records for 6 years after repayment.

 

Do payday loans affect your credit rating?

Yes — though whether it affects your rating positively or negatively can differ. It all depends on whether you repaid your loan on time and how a future lender views a payday loan on your record.

Some companies treat a payday loan that was paid on time the same way as any other loan repayment, which can have a positive effect on a credit score. However, others view payday loans as a sign that your finances have been stretched, and will penalise you for it, even if it was paid on time. Failure to repay will affect your score negatively, whoever you're applying to.

 

Which loan is right for me?

Now that we've looked at the details of both payday and unsecured personal loans, we can look at which one is right for you.

An unsecured personal loan can offer you much more flexibility over repayment and a lower interest rate. With a payment plan, you can spread the loan out over a period of time, making it much easier to budget and avoiding the stress of stumping up the full amount just days later. Also, you can avoid the negativity some lenders have towards payday loans if you wish to borrow in the future.

What's more, if you choose the right lender, you can still secure a personal loan within minutes to cover emergency expenses. Here at H&T, our personal loans service can provide you with a decision in minutes, followed by a bank transfer for the agreed amount straight into your current account. You can even use our loan calculator to see what your repayment plan would look like. You can also visit our personal loans FAQ if you would like more information on our application and repayment processes.

A payday loan should only be treated as a short-term borrowing solution, and you should only ever consider taking one out if you are certain that you will have the full amount on the agreed repayment day. If there is a chance to take out a personal loan instead, it's always worth exploring.

 

What are my options if I have poor credit?

The one advantage that a payday loan has is the fact that you don't need to pass a credit check, which is necessary for an unsecured personal loan. However, this isn't always the case: if you apply for your personal loan through H&T, our staff will make every effort to understand you and you won't be judged solely on your credit score.

If you don't want to resort to a payday loan, but aren't confident that you will pass a credit check, we also offer pawn loans that are a useful alternative. With this service, you can borrow cash against assets like gold, watches, jewellery, and designer clothing, so a credit check is not required. You can then pay back the loan over a period up to six months.

We also offer small business loans against your assets that require no credit check. These can be the ideal way to get your fledgling enterprise off the ground or to grow your established business.

 

We hope that this guide has helped you to work out whether a personal or payday loan is right for you. If you'd like more advice, simply get in touch or visit your local H&T store, where we'll be happy to help. You can also find plenty of other financial advice guides and money-saving tips in our knowledge centre.