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What Is the Difference Between Personal Loans and Payday Loans?

June 15, 2018
2 mins
A spread of Canadian twenty-dollar bills

While they may seem like a quick and easy way to access cash, payday loans (or cash advance loans) are high-risk products that have the potential to lead borrowers into a never-ending spiral of debt and interest payments.

A payday loan may be the quick fix that provides instant cash with minimal questions asked, but it can quickly lead the borrower into massive amounts of debt. In many cases, the borrower gets caught up in a vicious cycle of applying for more payday loans just to pay down the interest on their initial loan.

Why do people get payday loans?

Payday loans are typically marketed through smart and often misleading advertising campaigns as a sensible way to see consumers through until their next paycheque. However, these types of loans often come with exorbitant interest rates. Lenders don’t typically ask many questions and don’t generally conduct a credit check, so payday loans may seem enticing to vulnerable people who likely have a bad credit score and are under significant financial stress.

Why are personal loans better than payday loans?

The proliferation of payday loans is troubling, given that there are options available without the same predatory features.

Personal loans, for example, function more like a standard loan offered by a bank. But depending on the lender, they may not take that long to acquire. In most cases, a credit check is required before approval, but the interest rates are significantly lower than payday loans.

The amounts available through a personal loan are also usually larger than a payday loan because the lender performs due diligence and has evidence of the borrower’s ability to repay. This means the borrower can accept a bigger loan, and do a lot more with the money, like invest in a business, pay for home improvements or put a down payment on a home. And since personal loan terms are defined before funding is provided (three-year loan, five-year loan, etc,), the borrower knows in advance when they’ll be done making payments, and thus, can avoid the perilous loan cycle so commonly associated with payday loans.

Before getting a personal loan

Although it’s clear that a personal loan is the better option, consumers still need to do adequate research before signing on the dotted line. You wouldn’t buy a new car, stove or baby stroller without comparing features and prices online, would you? Loans are products and should be treated as such.

Before agreeing to any terms, educate yourself on the types of loans on the market, and start to examine the products that best suit your individual needs. Whether you’re looking to consolidate your debt, pay off credit cards, or renovate your home, the rate comparison site simplifies the entire research process by asking you a few personal questions like:

  • What’s the purpose for your loan?
  • How much would you like to borrow?
  • What’s your credit score range?
  • What’s your employment status?
  • What’s your total annual income?
  • What are your monthly debt payments?
  • Do you rent or own your home?
  • What are your monthly mortgage rent/mortgage payments?
  • Have you ever filed bankruptcy?

When used correctly, personal loans are a great tool for Canadians who want to access money at a reasonable rate. Read the small print, make sure you understand the terms, and only then should you submit your application.

Joe Rosengarten

Joe Rosengarten is a Toronto-based journalist and editor specializing in financial services and insurance. Originally hailing from London, England, he is the editor of, a regular contributor to and, and had articles featured in the Toronto Star and the National Post.

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