Finance Company vs. Payday Loan

Conventional finance companies require credit checks or collateral for personal loans and mortgages with interest rates higher than banks, up to 30 percent APR, for high risk borrowers. Payday loan companies offer consumers fast convenient cash loans to meet temporary yet critical cash needs with no collateral or credit checks required. Obviously, comparing them directly is apples to oranges. They both loan money, but there the similarities diverge.

A finance company by definition includes any company that loans money commercially to individuals or other companies. Banks, credit card companies, and payday loan companies are all examples of finance companies by such strict definition.

However, most consumers don't think of it that way. Traditional finance companies offer personal and mortgage loans that banks may not offer because of previous late payments or other factors reported by credit bureaus. They are the lenders of last resort when large amounts of money are necessary to prevent foreclosure or to consolidate even higher interest rate credit card debts.

Payday loan companies in contrast typically offer smaller sized loans from $100 to $1500 intended to bridge the gap between now and next payday. It's short-term emergency cash to, say, prevent a utility shutoff that would cost more than a payday loan in reconnect fees and deposits.

A consumer doesn't need to be severely disadvantaged economically to benefit from a no credit check payday loan. Middle class consumers whose credit is golden might prefer a simple payday advance, even it costs them $100, versus risking default on larger mortgage loans or credit card accounts.

While finance company personal loans require credit checks, payday loans usually require only a checking account, proof of employment and pay stubs, proof of identity and personal contact information.

Finance companies and payday loan companies are both frequently denounced by well-intentioned critics for charging excessive interest rates. But, both follow Federal Deposit Insurance Company (FDIC) guidelines intended to insure the financial safety and soundness of member banks, nonmember banks, finance companies and state-regulated payday loan companies.

If a larger amount is needed, but borrowing power is limited by a poor credit rating, then a finance company personal loan or mortgage may provide relief from a default on conventional bank mortgage or credit card loans.

A payday loan may be the only option if a finance company won't loan the money needed to prevent impending default on your mortgage or credit card. $1500 borrowed immediately with no credit check from a payday loan company may provide the leeway while circumstances improve.

Finance companies require credit checks for personal loans of $2500 and up. Their mortgage loans typically cost more than convention bank loans. Payday loan companies require no credit check to borrow $100 to $1500 to prevent immediate finance disaster that may cost much more than the cost of a payday loan.

It comes down to what is needed. Fast cash, short term with a high APR, comes from a payday loan company. Cash, with security and a poor credit report, comes from a finance company with a much lower APR. The best choice: put something away for a rainy day into savings and loan yourself the money.