Personal loans vs payday loans
Find out the differences between personal loans and short-term loans and how to compare them
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There is a wide range of loan options available to those who are in need of money. Each type of personal finance is suited to a different type of borrower and can be used for different purposes, and this includes personal loans and online cash loans.
In this guide, we break down the key differences between the two and outline their costs in order to help borrowers determine which will be the best loan for their needs and situation.
Are you struggling financially?
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⚠️ Warning about Borrowing
Do you really need a loan today?*
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.
|Payday loans||Personal loans|
Learn about more of the differences in fees and features in the guide below the table.
Compare payday loans and personal loans
What's the difference between personal and payday loans?
There are several key differences between personal loans and short-term cash loans:
- Loan amount. Customers can borrow up to $5,000 from many cash lenders, and some offer loans as high as $10,000. Personal loans come with much higher minimum and maximum loan amounts, with lenders rarely offering loans below $5,000 but having maximum amounts as high as $80,000-$100,000.
- Eligibility. Personal loans offered by banks and credit unions have strict eligibility criteria that often includes good credit and a regular income from employment or above a certain amount. Cash lenders that offer short-term loans are much more flexible and will consider those with bad credit, those who receive Centrelink payments as income or people who are unemployed.
- Lenders. Personal loans are offered by banks, credit unions, building societies and standalone lenders. Cash loans tend to be offered by lenders specialising in that type of product.
- Loan term. Cash loans come with much shorter terms, usually between 16 days and one year (depending on the loan amount). Personal loans, on the other hand, come with a minimum loan term of one year and a maximum of between five and seven years.
What are the risks of payday loans?
- Unaffordable repayments. Payday loans are an expensive way to borrow money and should only be used as a last resort. Check the size of each repayment and ensure you will be able to pay it on time. Unaffordable repayments can lead to late fees that will only make things worse.
- High rates and fees. Rates and fees on payday loans are high but there are rules in place so be sure to check your lender is not charging you more than ASIC allows. Also, look at what you would be charged if you are late on a payment or if you default on the loan altogether.
- Unreputable lenders. All Australian lenders should be accredited by ASIC. Check for a credit licence on the ASIC Register and ensure that the lender is easily contactable.
- Impact on credit score. Every loan application shows up on credit reports. While lenders might not consider credit history, applying for lots of loans within a short period can have a negative impact on your credit score in the future.
What is the cost difference between a personal loan and a short-term loan?
Online cash loans are heavily regulated by ASIC and lenders are restricted as to what fees and rates they can charge. Personal loans do not have such restrictions as long as they are offered by an Authorised Deposit-taking Institution such as a bank or credit union.
Payday loan costs
- Short term loans under $2,000 with terms of between 16 days and one year cannot charge more than a 20% establishment fee and a 4% monthly fee.
- Cash loans between $2,001 and $5,000 with terms of between 16 days and two years are restricted to a $400 establishment fee and an interest rate of 48% p.a.
- Payday loans over $5,000 or with terms longer than two years cannot exceed an interest rate of 48% p.a., which includes all fees and charges.
Personal loan costs
- Secured personal loan interest rates range from 5%-15% p.a. Establishment fees of between $100 and $350 may apply along with monthly fees.
- Unsecured personal loan interest rates range from around 8%-17% p.a. and can come with establishment fees and monthly fees.
- Peer-to-peer loans come with low rates that are based on your credit score. Rates can be as low as 4% or as high as 15% for unsecured loans but establishment fees may also apply.
How can I decide which type is right for me?
While there are similarities between these two products, there are stark differences as well. Asking yourself the following questions will help you decide which type of loan is right for you:
How much do you need to borrow?
Personal loans allow you to apply for a much larger loan amount, while cash lenders usually have maximum amounts of $2,000 (although some lenders will provide loans of up to $10,000).
When do you need the money?
Cash lenders offer a quick turnaround for your loan and can have your approved funds in your bank account within the next business day. Some personal loan lenders offer same-day turnaround for existing customers but the usual waiting time is a few days to a few weeks.
How is your credit history?
Online cash lenders have more flexible eligibility criteria than lenders offering standard personal loans. You may still be able to apply for a cash loan if you have bad credit or a low income. Personal loans come with more stringent eligibility criteria. The majority of personal loan lenders will require you to have good credit and will usually have a minimum income requirement to show you can repay the loan.
What can you afford to repay?
Short-term cash loans come with much higher rates and fees, meaning higher repayments. Your loan will be repaid in a shorter period of time but you need to determine your ability to afford the repayments. Personal loans come with lower rates and fees, and while they are spread over a longer term, they may make for more manageable repayments.
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