Is a Payday Loan Better than a Credit Card?

Credit card, and other revolving credit accounts, and payday loans are something of market competitors. Both of them allow for very small amounts of money to be drawn which is a service regular lenders typically do not offer. Both also allow for a convenient way to handle emergency expenses such as bills and car repairs when they manifest at times when money is short. Both also allow a debt to be financed for a rather long period of time, depending upon state and local regulations. There are some distinct differences between the two business models, however, that result in advantages and disadvantages between the two.

A payday loan is a short-term, low principal loan whose amount is determined as a percentage of the next paycheck the borrower is slated to receive. A credit card is a revolving account with a credit limit that is usually significantly higher than the borrower's monthly income. This difference is apparent in how the debts are designed to be paid off. A payday loan is designed to be paid off in a matter of weeks of being taken out; a credit card is designed to be a longer-term debt.

Payday loan debt is generally settled almost immediately after being taken out. The creditor collects their profit from a fee, expressed as interest, attached to the monies lent. Credit card debt is similar, but there are other variables with this type of account. Credit card companies typically attach fees and penalties to many of their customer's accounts and, quite often, arbitrarily change the interest rates their customers receive on their accounts. Payday loans are stable in this regard, with the amount agreed-upon for a payoff remaining constant from the beginning to the end of the loan. The payday loan companies have higher interest on paper, but the short terms of the loan mean that the financing charges are usually much less than they are with credit card debt.

Credit card companies have been taken to task very recently by congress, which has passed laws to prevent what many argue are abusive practices by the companies. Credit cards are also famous for issuing their products to almost anyone. The companies make their money principally on those customers who cannot pay off their debt and, therefore, who suffer fees and penalties attached to their principal. Payday loan companies need the debt paid back in full, therefore there is little motivation for them to extend the debt out to a long-term affair.

Generally, for small expenses, payday loans are easier for consumers to track and contain fewer "surprises" than do credit card accounts.