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Katie Francis

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Applying for personal finance can be an overwhelming process. Finding the right lender and choosing a loan term can be time consuming and confusing. While you’ll often hear quick loans referred to as ‘payday loans’, the two are far from interchangeable. In fact, they’re noticeably different from one another. So, if you’re unsure which loan type would best suit you, read on below.

What are payday loans?

A payday loan is a short-term borrowing option that lets you borrow up to $2,500 almost instantly. They can exist as a buffer for people to rely on between paychecks. Because payday loans are thought of as ‘instant cash’ loans, they can attract high costs and are notorious for exorbitant repayments. Their loan periods are also much shorter than for regular personal loans, with most offering repayments between 16 days and one year.

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

Pros and cons of payday loans

Pros Cons
  • Instant cash-in-hand once approved3;
  • Fewer application requirements than with regular loans;
  • Often no credit checks;
  • Unsecured, meaning no reliance on an asset for approval.
  • Can end up paying a high amount in fees and charges over the loan period;
  • Generally, a shorter repayment time but higher fees than regular loans;
  • Can be sued if loan is defaulted on;
  • Easy to become trapped in a debt cycle.

What are quick loans?

Like the name suggests, a quick loan is a personal loan that’s paid out quickly. Most online lenders offer payouts within one business day, with some offering disbursements within just 60-seconds of approval like Jacaranda Finance.

Most lenders will offer quick loans of up to $10,000 and lengthier repayment periods than payday loan lenders. Because personal loans offer more flexibility with borrowing amounts, their loan terms can be secured or unsecured.

Pros and cons of quick loans

Pros Cons
  • Help build credit score if repayments are made on time and consistently;
  • Extend repayment periods to ease financial stress;
  • Can use to consolidate debt;
  • Flexible borrowing limits;
  • Typically able to make extra repayments without having early repayment charges.
  • Possibility for high interest rates and charges;
  • Application and ongoing fees and charges;
  • Credit damage if repayments are missed or loan is defaulted on.

Main differences between payday loans and quick loans

There are plenty of differences between payday loans and quick loans that are typically missed by borrowers. While payday loans may seem more attractive to those needing instant cash, the charges that accompany them may not be ideal.

  • Fees and charges: 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.
  • Repayment terms: Payday loans are designed to be short-term solutions, unlike personal loans, which usually have 12 to 24 months to repay. While a quicker repayment period may seem desirable, the high rates associated with this can make repayments difficult. Payday loans can be difficult to repay using your next paycheck when you factor in the additional charges.
  • Credit scores: Meeting your personal loan repayment terms can help build your credit score over time. This can be handy for people who have bad credit, as it’s an opportunity to prove you’re capable of making repayments on time. Payday loans, on the other hand, don’t contribute to building your credit, no matter how strictly you stick by the repayment terms. This is because generally payday lenders don’t report your repayment history to the credit bureaus.

Why payday loans can be risky

Payday loans are widely advertised as simple, risk-free borrowing options. Lenders tend to broadcast their instant nature and short repayment periods, but fail to address any potential downfalls.

The biggest risk for payday loans is the unaffordable repayments once charges start adding up. Because payday loans are marketed towards those with bad credit history, lenders tend to target low-income communities, which can result in a cycle of debt.

Another risk of payday loans is lender reputation. As more payday lenders start popping up around the place, it’s not surprising that some are unreputable and don’t have accreditation from ASIC. This makes it super important to check a lender’s credibility before applying through them.

Laws surrounding payday loans

Payday lenders became subject to strict laws back in 2010 to crack down on borrowers being taken advantage of. Because they attract such high charges, payday loans legally have to be unsecured, and while lenders would typically refrain from checking borrower records, they now must review 90 days of bank statements before approving a loan. When it comes to repayments, there are also regulations about how much lenders can charge. Now, repayments cannot be greater than 20% of a borrower’s income if they receive 50% or more of their income through Centrelink.

How to choose between a payday loan and a quick loan

Even after learning the difference between payday loans and quick loans, it might still be tricky to choose the right one for you. With the expansion of digital lenders, the personal loan process is now so speedy that payday loans don’t need to be your last resort. So, in most cases, borrowers are financially better off to go down the personal loan route.

What to consider before taking out a loan

While quick cash may seem ideal when you’re stuck in a financial rut, it’s important to consider the bigger picture. For many, personal finance is a great option for getting their footing financially, but for some it creates a cycle of financial hardship and debt. Before applying for a loan, consider:

  • 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 be patient and use your own savings.
  • Can I afford the repayments? Even if you find a personal loan with competitive interest rates, you’ll still have to consider the repayments that come with this. You can use a loan calculator to figure out rough estimates of how much you can expect to repay.
  • Can I get financial help somewhere else? Many people are wary about asking friends and family for financial help, but in some cases it can be a good option before reaching for a loan. You’ll eliminate the interest fees and loan charges, and not impact your credit while you’re at it. Another option is looking into government benefits, and if you already receive these, looking into advancement options.

*If you have an NPP-enabled bank account

Written by: Katie Francis

Katie Francis is a Content Writer at Jacaranda Finance. She has a Bachelor of Business (Marketing)/Media & Communications from the Queensland University of Technology.