How it Works: Payday Loans vs. Quick Loans

Which should you choose?
Last modified: 8th April 2024
William Jolly  |  

Applying for personal finance can be an overwhelming and time-consuming process, with plenty of different lenders competing for your business. Finding the right loan for you can be confusing, especially when you consider all the different types of loans out there. 

A type of loan you’ll often see when searching for personal finance is a ‘payday loan’. This kind of loan can sometimes be thought of alongside a personal loan, but the two are actually noticeably different from one another. 

Not only are they different products, but a quick personal loan can be a much safer and more reliable choice than a payday loan. In this article, we’ll explain why you could be better off choosing a personal loan over a payday loan to cover your financial needs.


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Jacaranda Finance is not a financial adviser and the content on this page does not take into account your objectives, financial situation or needs. You should consider seeking independent legal, financial, taxation or other advice to check how the website information relates to your unique circumstances.

Jacaranda Finance is not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly by use of this website.


What is a payday loan?

Technically called ‘short-term loans’ or small-amount credit contracts (SACCs), payday loans are loan options designed to provide temporary finance solutions over a shorter period of time and for smaller amounts. Short-term loans typically let you borrow up to $2,000 and have loan terms that can range from 16 days to one year and tend to be relatively easy and quick to apply for. 

But if it sounds too good to be true, remember that it probably is. Payday loans are, unfortunately, infamously expensive in most cases, as we’ll explain below...

Payday loan fees and charges

Interestingly, payday loan lenders aren’t actually allowed to charge interest on payday loans. However, this doesn’t stop some of them from charging hefty amounts in fees.

According to ASIC, payday lenders typically charge the following fees:

  • Establishment fee: Maximum of 20% of the amount borrowed
  • Monthly fee: Maximum of 4% per month of the amount borrowed
  • Default fee: Charged for missed payments, varies between lenders. Fees cap out at double the original amount borrowed. 

Australia’s current credit laws state that interest charges cannot be more than 48% per annum. However, as payday loans don’t technically charge interest, these fees can sometimes add up to several times the original amount borrowed.

Main risks of payday loans

Payday lenders became subject to strict laws back in 2010 to crack down on borrowers being taken advantage of. But even with added protections being brought in for consumers, payday lenders can still represent a big risk if you’re not careful. 

Such lenders tend to broadcast their instant nature and short repayment periods as benefits but often fail to properly address any potential downfalls.

Here are some of the biggest risks you should be aware of when it comes to using payday loans. 

High fees

While personal loans attract regular interest fees and charges, payday loans are considered a high-cost alternative. Also, instead of calculating your charges on the repayment amount, payday loans calculate based on the original amount - meaning you’ll be paying the same charges even with $20 left to repay.

Customers who default on a payday loan can be looking at up to double the borrowed amount in charges. 

Potential for debt spirals

Payday lenders tend to target lower-income borrowers or those with lower credit scores who might struggle to get a loan approved by a traditional bank or lender. Once the unaffordable repayments start to add up, a cycle of debt can begin. 

Research from major bank NAB shows one in 10 Australians facing financial hardship had accessed a payday loan within a three-month period. What’s more, payday loans were also found to be the most stress-inducing debt of all.

On average, Australians with payday loan debts owed $6,200.

“It is often in desperate times that people access payday loans as a ‘quick-fix’ to make ends meet, without knowing the hidden costs involved,” NAB’s Mike Chambers said. 

“These debts can often spiral, leading to more long-term debt.”

They can hurt your credit and future loan applications

As we explain in our article on how payday loans can affect your loan applications, payday loans can have a negative impact on your credit score and future loan applications. 

As Jacaranda can view your transaction and loan history when you apply with us, we can assess your application based on how many short-term loans you’ve taken out, as well as a range of other factors. 

Using payday loans too often in a short space of time can indicate a lack of control over your finances. If the number of payday loan applications made is too high, the application can be declined. 

See also: How to improve your credit score.


Financial reform bill 2022: What to know

The Financial Sector Reform Bill 2022, passed by Parliament on 5 December 2022, is set to change the way such small-amount lenders operate and charge customers. 

The changes in the bill specify, among other things, that payday lenders and consumer lease providers cannot take more than 10% of a person’s net income for loan repayments.

It also stops lenders from charging monthly fees for the remainder of the loan term if the borrower pays the loan balance out early. 

“This reform is an important step in protecting Australians from predatory lenders,” NAB’s Head of Customer Vulnerability Mike Chambers said.


What is a personal loan?

A personal loan involves borrowing a specific amount of money from a lender and repaying the loan over a period of time that is generally longer than a payday loan. Jacaranda Finance offers personal loans starting from $3,000 up to $25,000, with loan terms ranging from 25 months to 48 months.

Depending on the lender and the loan itself, personal loans are generally a much safer and more affordable way to borrow money. Australian Credit Laws state personal loans can also charge a maximum interest rate of 48% p.a - much less than the standard payday loan. 
Some personal loans also provide enhanced flexibility through features such as extra repayments and redraw facilities and can offer more favourable terms if you attach security to the loan. At Jacaranda, for example, you can make extra repayments on top of your minimum required payments at no extra cost, which can save money in interest over the life of your loan.

How are quick loans different to payday loans?

Often used interchangeably with payday loans, a quick loan is actually a very different product. A quick loan is just another name for a personal loan that’s paid out quickly. Gone are the days of having to wait in line for hours at a bank: at Jacaranda, our quick personal loans can offer the following speeds to eligible applicants:

  • Complete your application in 5-12 minutes1 (this differs depending on the applicant)
  • Receive a same-day outcome during normal business hours once all information has been provided2
  • Most customers receive their funds in 60 seconds3 if they have an NPP-enabled bank account.

A quick loan with Jacaranda can provide speed without compromising on safety, flexibility or fair rates and fees.

How to choose between a payday loan and a quick loan

While quick cash from a payday lender may seem ideal, it’s important to consider the bigger picture. Your finances will thank you if you take the time to think through the potential outcomes of applying for a loan. 

In particular, you can ask yourself the following questions when applying for a loan: 

  • Is a loan worth it? If you’re borrowing for something that is unnecessary or you can save up for yourself, it might be financially smarter to develop some good savings habits
  • What are the fees and charges? A loan that promises instant results might sound great, but how expensive will it be? Take a good look at the interest rates and fees on the loan before applying. 
  • Can I afford the repayments? Failing to meet your repayments can cost you long-term, in the form of a lower credit rating and potentially losing an asset you used to secure the loan. 
  • What am I borrowing the money for? At Jacaranda, we offer loans for a wide range of life’s key expenses, such as holidays, home improvements, car repairs and everything in between. But if you’re just looking to pay for regular daily expenses, you might want to consider other options.

You should also consider the pros and cons of both loan options before deciding.

Payday loans vs quick personal loans: pros and cons

Below is a summary of the pros and cons of both loan options we’ve discussed throughout this article. 

Bear in mind that some of the ‘pros’ of payday loans, such as their fast approvals, may not be so good for you after all when you consider the potential downsides…

Pros

Cons

 

Payday loans

  • Applications and outcomes are usually very fast
  • Fund transfers are usually fast too
  • Fewer eligibility requirements than other loans
  • Usually unsecured, meaning no reliance on securing an asset for approval
  • Can end up paying a high amount in fees and charges over the loan period
  • Can be sued if the loan is defaulted on
  • Easy to become trapped in a debt cycle
  • Aren't as regulated by ASIC as personal lenders
  • No credit checks mean you can get approved for an inappropriate loan
  • Can harm your credit score if you miss repayments
  • Many payday lenders don't actually improve your credit score if you pay them on time

Quick personal loans

  • Can help build credit score if repayments are made on time and consistently
  • Credit checks and suitability checks on all applicants
  • Longer repayment periods and larger loan amounts
  • Flexible repayment options (save money on your loan by making extra repayments)
  • Can be used to consolidate debts
  • Can also be fast, without the exorbitant fees
  • Fixed interest rates can make budgeting easier
  • Flexible borrowing limits
  • Fees and interest rates can still be high (costs vary according to the lender)
  • Eligibility requirements can be stricter - approval is not guaranteed
  • You can damage your credit score if you miss repayments or default on the loan
  • If secured against an asset, you could lose it if you default on the loan

Resources for debt help

If you’re struggling with payday loans or other debts, you can call the free National Debt Helpline on 1800 007 007 (Monday – Friday). Aboriginal and Torres Strait Islander peoples can also call the free Mob Strong Debt Helpline on 1800 808 488.

ASIC MoneySmart also recommends doing the following:

What if I can’t qualify for a personal loan?

In most cases, personal loans can be a safer, cheaper and more reliable way to borrow money. But depending on the lender, not everyone can qualify. Payday loans tend to market themselves to people who might need money for emergencies or daily essentials and have exhausted all other options. 

If you can’t qualify for a personal loan, there are other avenues available before you turn to a payday loan. In addition to the resources posted above, the No Interest Loan Scheme (NILS) is one option to help you get back on your feet. 

A no-interest loan lets you borrow up to $2,000 to pay for essential goods such as fridges, washing machines and car repairs. Run by Good Shepherd and partially funded by NAB, this loan charges no interest or fees to those who are eligible.


About Jacaranda’s quick personal loans

Payday loans tend to promise fast loan applications and approvals at the expense of compromising on responsible lending and affordability. At Jacaranda, however, our quick personal loans can offer speed as well as affordability and thorough loan assessments. 

At Jacaranda, we provide hard-working Australians with fast, reliable and responsible access to finance for life's expected or unexpected major expenses. We verify your unique financial position to make sure you can comfortably afford your loan repayments in your budget. We explain every aspect of your loan to you, including terms, fees, interest rates, repayments and more. 

Don’t get lured in by a payday lender promising fast money: it could cost you much more in the long run. Instead, consider applying for up to $25,000 with Jacaranda today.

Written by - William Jolly

Content Manager
William is the Content Manager at Jacaranda Finance. He has worked as both a journalist and a media advisor at some of Australia's biggest financial comparison sites such as Canstar, Compare the Market and Savings.com.au, and is passionate about helping Australians find the right money solution for them.

You can get in touch with William via williamj@jacarandafinance.com.au.
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