What is the difference between a personal loan and a payday loan?

When life throws you a curveball, it can be tempting to use whatever money you can – and quickly. But not all loans are created equal and sometimes quick cash can come with some pretty hefty fees. 

Loan amount and term

A key difference between personal loans and payday loans  – otherwise known as small amount credit contracts (SACCs) – is the loan amount and term offered by the two different services. 

A personal loan may have a higher minimum and maximum loan amount than a payday loan, generally between $5,000 and $50,000, though this will vary between lenders. This loan amount is usually paid back over a longer period of time – generally between one and seven years. 

A payday loan generally allows you to borrow small amounts of up to $2,000 to be repaid in a very short period. The legal time frame for a payday loan is just 16 days to 1 year, so it truly is quick cash. But try not to make hasty decisions, as payday loans may be expensive and impact your ability to access other kinds of finance in the future.

Loan purpose 

A personal loan is typically for a planned expense or significant life event. At Plenti, our borrowers use them to bring big ideas to life, whether that’s a wedding, home renovation, holiday, or even medical or dental costs. 

A payday loan is intended to be a quick fix or emergency cash. While these can be effective short-term solutions, you might find the downsides to payday loans to be detrimental to your financial health if you are unlikely to meet the repayment obligations. 

Turnaround times

With many lenders operating online these days, you can generally expect to hear back about your personal loan application within a few business hours to a few days. Once your contract has been signed, you can expect your funds in your account within a couple of business hours, though this varies between lenders. 

Payday lenders are known for their speed and many will market themselves as quick cash in an emergency. This means you might expect to see funds in your account within an hour of submitting your application. 

Fees and interest rates

A personal loan will include an annual interest rate that’s built into your repayments. This interest rate might be personalised based on a few factors, including your credit history, and will vary from lender to lender.

Personal loans can also include fees, such as establishment fees and monthly account-keeping fees. You should check whether any fees are built into your estimated repayments at the time of your application. You may also incur missed or late repayment fees. The interest rate and certain fees are packaged together and are used to create the comparison rate. This can help you compare lenders when they each charge different fees.

Payday lenders cannot charge interest, but they do have a comparison rate which is a good indication of their overall cost compared to a standard personal loan. 

Instead of an interest rate, payday lenders may charge a range of fees. The fees charged vary between payday lenders, but they are regulated. The maximum you can be charged is: 

• Establishment fee: maximum fee is 20% of the amount borrowed
• Monthly fee: maximum fee per month is 4% of the amount borrowed
• Default fee: charged if you don't make a repayment by the contract due date. The maximum you can be charged if you default is double the amount you borrowed¹

The verdict:

We know life can be full of unexpected – and unwelcome – surprises, so a payday loan can seem like a quick and easy solution. However, the exorbitant costs and long-term impact on your financial health can outweigh the short-term benefits. If you’re in a tight spot, we recommend comparing your options and checking out the Government’s MoneySmart website before making any final decisions.