Payday loans and credit cards: Which one is better, and more importantly, which one is worse.
If you find yourself in a situation where you need quick cash, you might find that you have a couple of options to choose from.
If you have a credit card you can simply withdraw cash from an ATM, or you can apply for a payday loan and have the money transferred to your account on the same day, or sometimes within the hour. Cash advances and payday loans can be useful when you need access to cash fast. Both of these services are quick to provide money on the spot for any purpose, whether it is an emergency or not.
With a credit card cash advance, you can typically use an ATM to withdraw funds from your line of credit. Paydays are a short term loan that is designed to cover expenses that come up while you are waiting for your next pay. Both options have their own benefits and drawbacks that you can read about on the page below.
Sunshine Short Term Offer
This is a short term loan offer with a fast and easy online application for bad credit borrowers who are employed. You can apply today to get approved for up to $2,000.
- Loan Amount: $2,000
- Loan Term: 9 weeks
- Turnaround Time: 30 Minutes - conditions apply
- Total Cost of Borrowing $100: 20% of borrowed amount + 4% of borrowed amount each month
- Bad credit borrowers OK
- Quick and easy Approval
- No Credit Checks - Must be employed
Warning about Borrowing
It can be expensive to borrow small amounts of money and borrowing may not solve your money problems.
Check your options before you borrow:
- For information about other options for managing bills and debts, ring 1800 007 007 from anywhere in Australia to talk to a free and independent financial counsellor
- Talk to your electricity, gas, phone or water provider to see if you can work out a payment plan
- If you are on government benefits, ask if you can receive an advance from Centrelink: Phone: 13 17 94
The Government's MoneySmart website shows you how small amount loans work and suggests other options that may help you.
* This statement is an Australian Government requirement under the National Consumer Credit Protection Act 2009.
How does a payday loan and credit card cash advance work?
Both payday loans and credit card cash advances are types of credit that can be used for whatever you need or want. There are no specific restrictions on how you use the funds, making them suitable for a sudden car repair, groceries or even a weekend getaway.
Payday loans are designed to be financial stopgaps, whereas credit cards are ongoing lines of credit. The cash advance feature of a credit card is not designed to be an ongoing solution to cash shortfalls, and the same can be said for payday loans. This may explain both products' high cost.
The differences between payday loans and cash advances
|Features||Payday loans||Cash advance|
|Fees||20% establishment fee + 4% monthly fee||Approximately 1.5-4%|
|Interest||Interest is charged as fees as above||Approximately 19-22% p.a.|
|Terms||Vary between 14 days and 12 months||Ongoing line of credit, no set terms|
|Eligibility||Flexible criteria. Bad credit, Centrelink, unemployed accepted.||Need to be employed and have good credit.|
Weighing up your options
Pros and cons of applying for a payday loan
Most payday loans require a minimal amount of criteria needed to be approved. This includes income, age and residency requirements.
- Fast turnaround
You will usually receive an answer instantly or within 5 minutes, and the money within a day or two.
- Short terms
The requirement for these loans is that you pay them back quickly, leaving you with no extra debt to worry about.
Although the rates are mandated by the government, they still are higher than a typical personal loan would be. Plus the fees can mount up if you are late on a repayment.
- Overall cost
In general, the overall amount of money you will spend for this service makes it a non cost effective way to handle your finances.
Pros and cons of withdrawing cash with your credit card
There are no additional applications needed with a credit card cash advance. You only need to find an ATM and withdraw the cash you need.
- Concise billing
As the cash advance is part of your credit card billing, you won't have the worry of a new account.
- Flexible repayments
So long as you don't mind the accrued interest, you can pay off a credit card cash advance at your convenience.
- Interest rates
The interest rate charged for a credit card cash advance is considerably higher than what you would pay for your standard personal loan. You'll also accrue interest from the moment you make the cash advance.
- Overall cost
Like the payday loan, the overall cost of the cash advance makes it an option you should think twice about before using.
How to know what to apply for
Even after understanding both products, you still might wonder which one is right for you. Asking yourself the following might help you decide which is the right application to submit:
- Do you have bad credit? If your answer is 'yes' and you don't already have a credit card, then you may not be eligible to be approved for another one. Review the eligibility criteria of the products you are interested in before submitting your application, but if you are weighing up your options between a credit card and a payday loan and you have bad credit, you may find you are only eligible for the latter.
- Do you already have a credit card? If you do, check what interest rate you will be charged for taking out the cash advance. Also check how much credit you have left in your account and if it will be sufficient for what you need. You can then use this information (the interest rate) to compare it with your payday loan options and see which one will be more expensive based on when you can repay the money.
- When will you be able to repay the money? This is an important factor to consider. Payday loans are designed to be paid in the short-term, so before you apply make sure you can afford the repayments set out by the lender. If you aren't sure when you can repay, remember that a credit card cash advance can easily get out of hand if you don't repay it quickly – there is no fixed repayment term and the interest can just keep rolling over costing you a lot of money.
It’s always important to compare your options before applying for a payday loan or taking cash out on your credit card. Many financial experts advise to explore other avenues before applying for a payday loan or withdrawing money on your credit card. Due diligence is a must with both products.