Is a Salary Advance From a Bank Better Than a Personal Loan?

We've all encountered an unexpected expense from time to time.

Many of us have been there. You had a car mishap, and now you've got to pay the mechanic to fix it. This unplanned expense will cost you a few hundred dollars, and like 60% of Americans, you're not able to cover it out of your savings. Plus, you're down to only money for the bare necessities in your checking account, and your next payday is several days away. What should you do?

You have a few options in this situation. Read on to learn about bank salary advances versus personal loans, and how to decide which is a better fit for you.

What is a salary advance?

A salary advance loan from a bank or a credit union is what's known as a small-dollar loan. These are loans in amounts typically ranging from $100 to $1,000, given by a bank to account holders. The intention is to give consumers an alternative to predatory payday loans (discussed below) when they are in a financial bind. If your bank offers these, you'll receive the money you need quickly, and pay it back from your next direct deposit paycheck, or over a period of weeks or a few months. You'll be assessed a fee (either a set dollar amount or a small percentage of what you borrow) and interest for the service.

You may soon be hearing more about salary advance loans; a report from Bloomberg Law in early Oct. 2022 noted that federal regulators want banks to be able to offer them, but banks need more guidance from regulatory agencies to move forward. Personal loans, on the other hand, are already reliably available for your emergency borrowing needs.

What's a personal loan?

A personal loan is a fairly easy way to borrow a lump sum of money. They typically come with lower interest rates than many other quick-money solutions, like credit cards or salary advance loans (and definitely lower than payday loans). However, if your credit isn't in the best shape, you may not qualify for the best personal loan rates available.

Personal loans generally come in amounts of $1,000 to $100,000, and they can often be funded pretty quickly after your application is approved. In some cases, you can get the money the same day or the next day. Is there another way to borrow money in a hurry? Yes, but you probably will want to steer clear.

Try to avoid payday loans

While it may seem counterintuitive (after all, it's got "payday" right in the name), it's a good idea to avoid payday loans. And depending on where you live, they may be illegal in your area; they've been banned in 13 states and the District of Columbia. Payday loans are short-term small loans of usually $500 or less that come at a very high interest rate.

As of 2022, typical payday loan rates range from 28% all the way to 1,950%. These loans often snare consumers into a cycle of debt they can't easily escape. Can't pay back your loan on your next payday? That's fine, the lender will roll it into a new payday loan for you! How kind of them. Your best choice is likely a salary advance loan or a personal loan.

How do you choose?

There's a few things to consider when deciding between a salary advance and a personal loan.

How much money do you need?

A salary advance loan, if you can get one from your bank or credit union, is likely better for borrowing smaller amounts. If your auto repair bill is $350, but the smallest personal loan amount you can take out is $1,000, that's not ideal. If your surprise expense is larger, though, you will likely get a better interest rate with a personal loan (plus your bank's salary advance loans may be capped at $500).

How fast do you need it?

If you can wait a few days and you have good credit, you may do better with a personal loan -- because, again, interest rates. That said, if your bank offers salary advance loans, it could approve you pretty fast if you're an existing customer in good standing. It already has you on file, and can access your finances in the form of your bank account(s). Plus, your bank can easily send the money you're borrowing straight to your account.

How long do you need to pay it back?

Here's where a personal loan likely has the edge. You will get longer to pay back a personal loan (months to years) than you will a salary advance loan (weeks to months). But again, a lot rides on how much money you need to borrow.

Both salary advance loans and personal loans have their place, and if you're ever in a bind and need to borrow a relatively small amount of money, both are worth considering. It's definitely in your best interest to avoid payday loans, though.