Personal Loan vs Payday Loan: Why You Should Avoid Getting A Payday Loan

Get the Best Personal Loans in Singapore

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You’ve been there before. Something just happened that requires you to spend hundreds of dollars (if not thousands), but there’s not enough money in your bank account. To make matters even worse, your paycheck isn’t arriving for another two weeks. As we are approaching the holiday season filled with plenty of spending necessities for gifts and presents, you might feel even more pressure than usual to get hold of some cash now.

What can you do to get the money you need? It may be tempting to consider getting a payday loan, but we want to warn you that it’s a seriously dangerous proposition. You may have heard many people say such things before about how dangerous a payday loan can be in Singapore, but we wanted to show you a concrete example to demonstrate just how damningly expensive it can be.

What Is A Payday Loan?

A payday loan is a short-term, high-cost loan that gives you money that you need until you receive your next paycheck, as the name suggests. Typically, your paycheck is used to pay off this loan so it’s a way of “pulling forward” your income by a few weeks or days in exchange for a high interest rate and fees. It is a very easy loan to get because lenders usually don’t check your credit score, and only ask for proof of income to ensure that you will be getting paid soon. This also means that a payday loan will have to be smaller than your paycheck, so you should not count on it to provide a significant amount of money anytime you need it.

However, the downside of this loan is quite significant because interest rates charged by the lenders are extremely high: while credit cards in Singapore charge an annualized interest rate of 25% (so about 2% per month), payday loans can charge up to 24% of interest for just 2 weeks. Comparing it on a monthly basis, a payday loan’s 48% (24 per 2 weeks x 2) can be around 25 times costlier than a credit card debt that you might carry. No matter how desperate you might be, borrowing S$760 by sacrificing your S$1,000 paycheck seems like a bad deal.

Pros of Payday Loan

  • No credit check: payday lenders usually don’t check your credit history, so you can borrow money even if you might have some unpleasant history with credit cards and debts.

Cons of Payday Loan

  • Extremely high interest rates: payday loans can cost 24x more than credit card debt on a monthly basis. Although you can get cash before your paycheck, you will be losing 24% of your paycheck just like that.
  • Potential Crisis: if you don’t pay off your payday loan quickly, it will snowball into a massive amount that you may never be able payback because interest rates are so high. This has potential to ruin your life.

Are there other options available?

The short answer is an emphatic yes. There are plenty of options for people who need money quickly other than payday loans, and they are also much cheaper than a payday loan. Even if you need the money immediately within 24 hours, there are definitely more viable and less dangerous alternatives in Singapore.

For instance, a personal loan in Singapore is easy to obtain because most banks process your application and provide money within 1 day. They are also relatively cheap, carrying on average only 6-7% p.a. plus nominal fees. Even a credit card debt costs less than other types of debt, 25% per year on average, and is immediate because you just need to use the card to pay for whatever you need even if you can’t pay the card balance in full any time soon.

If you have bad credit, a low salary, or are otherwise unable to obtain a personal loan from a bank, you may want to consider a loan from a moneylender, instead of a payday lender.

Consider this if you are unable to obtain a personal loan from a bank
  • Eligibility
    • S$1,600 per month
    • Max. Loan Amount
      • 6x monthly salary
      • Min. Loan Amount
        • S$500
        • Processing Fee
          • Varies
          • Approval Time
            • 1 day

            We recommend using Lendela, an online platform that provides free, customised personal loan offers. It's a great fit for those that want to compare all of their options before applying for a loan.

            Student Loan, Mortgage and Renovation Loans

            Also, if you know exactly why you need the money, you may have other venues to borrow at a better rate. As a rule of thumb, loans made for a specific purpose carry a lower cost and interest rates. For example, student loans and home mortgages cost so little because lenders know exactly why you need the money, and in the case of home loans, the loan is secured by the borrower's property. Home renovation loans are also available for certain home improvement projects. Knowledge is power, and banks believe these loans have lower risk because they have more information about the borrower.

            A payday loan is on the other end of the spectrum because the lender doesn’t know anything about you other than your last paycheck. Therefore, it is highly recommended that you check out other more “specific” loans available in Singapore that are designed for your needs. If you need the money to pay your home renovation contractors, you can take out a renovation loan. If you need help paying for your tuition, you could take out a student loan from a bank at 4-5% p.a. interest rate. These loans take longer to process, but they are definitely worth checking out.

            Payday Loan vs Personal Loan

            If you need money as soon as possible, and are trying to choose between a payday loan and a personal loan, we would recommend you to go with a personal loan almost every single time. There are only a few rare occasions when a payday loan may make more sense than other options like personal loans. Below, we discuss advantages of a personal loan over a payday loan, and illustrate in a table a few examples of who may prefer.

            Payday LoanPersonal LoanCredit Card
            Annual IncomeLess than S$20,000More than S$20,000More than S$30,000
            Amount You NeedFew Hundred DollarsThousands of DollarsFew Hundred to Thousands of Dollars
            Payback PeriodFew days to weeks1 Year or LongerFew Days, Weeks or Months
            Other ReasonsNo access to credit cards or personal loans

            First and foremost, personal loans are much cheaper than payday loans, especially if you have an annual income above S$30,000 (though some banks still grant you a personal loan if you earn S$20,000 or more per year). A personal loan should cost you only 7% of annual interest at most, and banks in Singapore usually approve your loan within a day. Hence, it's cheap to get cash fast.

            Secondly, a personal loan in Singapore is very easy to manage because it can be repaid over a longer period of time. Each payment can be divided into equal smaller parts compared to a payday loan which can take your entire paycheck at once. Not only that, the lender shows you exactly how much you have to pay every month to pay off your debt gradually over time.

            Lastly, a personal loan can offer a bigger sum of money than a payday loan. The amount of personal loans you can get ranges from thousands to tens of thousands of dollars. So in case of a real emergency, a personal loan can be a much more dependable source of capital than trading your paycheck.

            Credit Card as an Alternative

            Even in cases where you only need a few hundred dollars that you plan to pay back very quickly, other options like credit card is a much better option than a payday loan. Just like payday loans, credit card debt doesn't require you to go through an approval process, and you can pay back your money whenever you want. Even its 25% annualized interest rate is much lower than 24% interest per 2 weeks you typically see for a payday loan.

            The only time that you might get a payday loan is when your income is below S$20,000 annually and you don’t have access to a credit card either. In these cases, there aren’t many places that will lend you money. However, even for these situations, a payday loan can only provide a few hundred to thousand dollars at a time because the lender won’t give you more money than your next paycheck.

            If you're facing a financial emergency and have no other options, a payday loan could be your only way. However, remember that your next paycheck will have to go directly to the lender, so you need to manage your finances closely so that you are able to live even without your next paycheck. With interest rates being as high as they are for these products, you don’t have much room for error.

            Parting Thoughts

            It can be quite difficult to save money in Singapore. In the midst of rising living costs like MRT fares, CPF contributions and university tuitions, people might find themselves without sufficient savings to access when faced with a financial emergency. Sometimes, such situations may require an assistance of financial loans. However, a payday loan can be an extremely egregious form of capital in Singapore. Please consider other options like personal loans, credit card debt and even cash advances before going to a payday lender. If you find yourself getting payday loans often, you really should reconsider your financial priorities and do your utmost to get your life back in order.

            Duckju Kang

            Duckju (DJ) is the founder and CEO of ValueChampion. He covers the financial services industry, consumer finance products, budgeting and investing. He previously worked at hedge funds such as Tiger Asia and Cadian Capital. He graduated from Yale University with a Bachelor of Arts degree in Economics with honors, Magna Cum Laude. His work has been featured on major international media such as CNBC, Bloomberg, CNN, the Straits Times, Today and more.

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