Pay on demand vs credit card

Pay on demand and credit cards at a glance

Pay on demand is an app-based loan product. With it, you can access part of your pay before payday. This can be useful when you find yourself short and need funds urgently. Generally, a fee is charged instead of interest. The repayment is either staggered over a period or expected the following payday. There are several types of providers, including non-bank apps that don't involve your employer. Other options include bank offered services, and employer-offered services. You are essentially borrowing part of your pay cheque before you get paid.

In contrast, a credit card allows you to borrow money you don't have, to be repaid over time, often with interest. This can be useful if you don't have the money to pay for something, or if you don't want to pay upfront. With credit cards, you have to pay your balance on time to avoid accruing interest. There are different types of credit cards, including no-interest monthly-fee cards.

How do the features of pay on demand and credit cards compare?

We'll compare a typical pay on demand service, a monthly fee credit card (which doesn't charge interest) and a regular credit card (which does charge interest).

Our expert says

"Unexpected debts happen - Finder research shows 18% of Australians experienced a financial emergency in a 5-year period. If you can't afford to pay an urgent expense, pay on demand can be useful - but make sure you can afford to pay that back again by the following pay. A credit card gives you more flexibility and potentially larger sums, but you still need to pay it off as quickly as possible to avoid spiralling interest costs. Bottom line? If you have to go into debt, plan carefully for how you'll repay it. Don't just borrow and forget!"

Angus Kidman

Editor-at-large

How much can I borrow?

Pay on demand borrowing limits

This will depend on the service provider. Some providers offer up to 25% of your pay cheque in advance, while others may offer less. You should be able to borrow from $100 up to $1,250.

How much you can actually borrow will depend on how much you earn. Your credit limit will be calculated based on that.

Credit cards borrowing limits

Your credit limit will depend on the type of credit card you apply for and your personal circumstances.

With a traditional credit card, your minimum credit limit will range from $5,000 up to $20,000. This is based on your income, employment status and creditworthiness.

With no-interest monthly-fee credit cards, the limit ranges from $1,000 to $3,000. This is subject to assessment and approval.

Ultimately, you will only receive a credit limit you can reasonably afford over a 3-year period.

How much does each cost?

Pay on demand costs

For the most part, providers don't charge interest. Instead, they charge a flat fee. You can be charged up to 5% of the amount loaned. Others may charge up to $10 per transaction. With employer-offered services, your employer may cover the fees.

While some apps don't have late fees, others may charge a late fee. Some apps also apply interest if you don't repay by the nominated date.

Credit card costs

With traditional credit cards, you'll have to account for fees and interest. There may be annual fees ranging from $0 to $400 or more. Interest rates can be high, ranging from 8.99% p.a. to 24.99% p.a. There are also some credit cards that offer 0% interest during the introductory period.

In contrast, a no-interest monthly-fee card doesn't charge interest. As the name implies though, there is a monthly fee, ranging from $10 to $22. This will depend on your credit limit.

Where can I use these services?

Pay on demand use

Once the money is in your account, where and how you choose to spend it is up to you. You can move the money around as you wish, using standard payment methods like cash or debit cards to make your payments

Credit cards use

You can use credit cards anywhere that accepts card payments. This can include overseas retailers. Most places in Australia accept Visa and Mastercard. Many places also accept American Express. If you want cash, you'll have to pay a one-off cash advance fee including interest charges.

How do repayments work?

Pay on demand repayments

This depends on your service provider. In general, pay on demand has a short loan term. With some lenders, it's a maximum of 31 days, with others it's 62 days. You may not be able to split your payments, but some lenders have this option. Your repayments will include the principal amount borrowed plus any fees. It will be automatically deducted from your account. You'll have to settle your repayments before you can apply for another advance.

Credit card

Unlike pay on demand, with credit cards you have the option to make minimum payments each month. It could be a fixed amount as with a no-interest monthly-fee card. You could also opt for an instalment plan and pay equal amounts every month. With traditional credit cards, you generally have to pay around 2-3% of your balance. Your monthly repayments could be anywhere from $35 to $110 or more. You have the flexibility to pay more for some months. Keep in mind that by only paying the minimum every month, you're not actually clearing your debt.

How do I apply?

Applying for pay on demand

You can download the app from the relevant provider to sign up for the service. The app will be available on the App Store or Google Play Store. You may have to connect the app to your bank account. This helps determine how much you get paid, which is used to calculate your credit limit. The same applies for employer-run services. You can enter your employment details in the app to get started. You'll need to meet some requirements to qualify, including age, income, citizenship and employment requirements. Most providers don't perform a credit check.

Applying for credit cards

To apply for a credit card, you'll have to fill out an online application and provide the relevant details. Applications are generally quick, and you'll find out if you're approved within 60 seconds. You may be conditionally approved, after which you'll have to submit supporting documents. The documents you'll need to provide may include identification, income and tax assessments. Some lenders may have a virtual card, allowing for immediate use, but most don't. You should account for the waiting period, which may take around 5 to 10 days.

Which option is right for me?

No credit product is perfect, they all come with limitations. Whether pay on demand is better than a credit card will depend on what you want out of your loan. Here's what you need to keep in mind:

Pay on demand may be suitable if:

• You need access to funds immediately and don't have a credit card.
• You want a loan for a short term only.
• You need emergency funds for a relatively small amount.
• You need a loan with capped fees.

What to watch out for with pay on demand

• Fees. If you're planning on using pay on demand regularly, you should calculate how much you will be paying in fees for that period. It may seem like a small amount, but fees can add up, and it may work out to be more expensive.
• May create budgeting difficulties. While it may be useful to access your pay in advance, don't forget that you have to pay for the loan from your upcoming pay. This deduction from your pay may create budgeting problems for the coming month/s, creating financial stress.
• Not a long term financial solution. It may be tempting to rely on this service as it's easy to access and use. If you're experiencing financial difficulties, this may not be a long term solution. Contact a financial counsellor if you're experiencing difficulties.

A credit card may be suitable if:

• You want the option of repaying your loan over a few months or longer, without worrying about late fees.
• You're punctual with your repayments.
• You want access to ongoing credit for unexpected costs.
• You want to build a good credit history.

What to watch out for with credit cards

• Interest charges. Don't forget: You will be charged interest if you don't make your repayments on time. This can add up and your debt can spiral out of control. Make your repayments on time, try to pay off the debt as fast as you can and only use your card in emergencies.
• Fees. Apart from interest, you also have annual fees to contend with. You will have to pay this fee even if you're using the credit card sparingly. These costs add up and may make credit cards an expensive option.
• Trigger-happy spending. Revolving credit when you want it, as you want it may lead to unfettered spending. Once you've got the card, it may be tempting to pull it out for every season. Keep in mind the costs involved, to make no mention of the debt you're getting into. Use the card responsibly.

Signing up for pay on demand or wage advance apps is certainly easier. There is no credit check involved and you get access to funds faster. However, credit cards may come with higher credit limits and more flexible repayment options.

To make sure you get accurate and helpful information, this guide has been edited by Angus Kidman as part of our fact-checking process.

Written by

Richard Fairbairn

Assistant publisher

Richard Fairbairn is Finder’s associate publisher for personal loans. He has been helping people make better financial decisions for over five years. Away from his desk, Richard enjoys all things musical and camping, preferably both at once. See full bio