Payday Loans vs Personal Loans

Name: How Does a Payday Loan Work? - Jacaranda Finance
Brand: Jacaranda Finance
Rating: 4.9 (2931 reviews)

Which should you choose?
William Jolly | 10 mins read

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.

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 over loan terms that can range from 16 days to one year. They also 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…

See Also: What is a Wage Advance?

Payday loan fees and charges

Interestingly, payday loan lenders aren’t technically allowed to charge interest. However, this doesn’t stop some of them from charging hefty fees to compensate.

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. Though payday loans don't technically charge interest, the fees charged can add up to more than an equivalent interest rate.

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 significant risk if you’re not careful.

Such lenders tend to promote their instant nature and short repayment periods as benefits but often fail to adequately 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 it’s true that personal loans attract regular interest fees and charges, payday loans are considered a high-cost alternative. Also, instead of calculating your charges based 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.

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 in November 2022 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.

“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.

When you apply with Jacaranda, or indeed with many other lenders nowadays, your recent transaction and loan history can be seen and reviewed. We can assess your application based on how many short-term loans you’ve taken out, among 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.

Financial Reform Bill 2022: What to Know

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

The bill's changes 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.

Average payday loan debts

NAB also found that Australians with payday loan debts owed nearly $1,000 on average, with older generations owing more overall:

Demographic	Average Payday Loan Debt
18-29	$944
30-49	$1,129
50-64	$1,330
65+	$1,304
Men	$728
Women	$1,286
Lower-income	$1,201
Higher-income	$899
Overall	$996

Source: NAB Australian Wellbeing Survey Q2 2024.

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, known as the loan term. These loan terms are generally longer than those available with a payday loan.

The amounts you can borrow from a personal lender also tend to be larger than those from payday loans. For example, Jacaranda Finance offers personal loans starting from $3,000 up to $25,000, with loan terms ranging from 25 months to 36 months.

Depending on the lender and the loan itself, personal loans are usually a much safer and more affordable way to borrow money. Australian Credit Laws state that personal loans can charge a maximum interest rate of 48% p.a. - often much less than the equivalent fees on a 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.

Our quick personal loans can provide speed without compromising on safety, flexibility or fair rates and fees:

Complete your application in 5-12 minutes¹
Receive a same-day outcome during normal business hours once all information has been provided²
Most customers receive their funds in 60 seconds³ once approved if they have an NPP-enabled bank account.

How to choose between a payday loan and a personal loan

While quick cash from a payday lender may seem ideal, it’s essential 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 personal loan instead.

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 wiser 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, such as a credit card.

You should also consider the pros and cons of both loan options before deciding. You can estimate your loan repayments with our calculator to help you decide.

Payday loans vs 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…

Payday Loan Pros

Applications and outcomes are usually very fast.
Fund transfers are generally fast, too.
There are fewer eligibility requirements than other loans.
Typically unsecured, meaning no reliance on securing an asset for approval.

Payday Loan Cons

You can end up paying a high amount in fees and charges over the loan period.
It is easy to become trapped in a debt cycle.
They aren't as tightly regulated by ASIC as personal lenders.
Some SACC lenders may not perform credit checks, which means you may be approved for an inappropriate loan.
It 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.

Personal Loan Pros

It 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).
It can be used to consolidate other debts.
It can also be fast, without the exorbitant fees.
Fixed interest rates can make budgeting easier.
Flexible borrowing limits.

Personal Loan Cons

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:

Check your credit report for free every three months.
Find free financial counselling services in your state or territory.
Find free legal advice services in your state or territory.
Make a repayment plan with your lender.

What is financial hardship

If you’re struggling to repay your loans or debts, you could be eligible for financial hardship assistance.

Financial hardship is when your bank, lender, or credit card provider offers you a temporary alternative arrangement to help you get back on track and resume regular repayments. Lenders usually have to have some kind of hardship policy in place: they are obligated to provide you with the opportunity to apply for hardship assistance, and it is likely in their best interest to do so.

Learn more about how financial hardship works here, or get in touch with Jacaranda to find out more about our own hardship assistance options.

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. However, depending on the lender, not everyone can qualify. Payday loans tend to market themselves to people who might need cash 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 Personal Loans can offer speed as well as affordability and thorough loan assessments.

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.

You could apply for one of our loans in as little as 5-12 minutes¹, with same-day approvals² and 60-second transfers available once approved³.

Check if you qualify today without impacting your credit score at all!