Payday loans versus personal loans.

Taking out a loan can be a super handy way to achieve personal goals. A loan can also be a source of funds if you don’t have a lot of savings behind you, or if you’d rather hang onto your savings for other purposes.

Both payday loans and personal loans provide cash when you need it. But it’s worth knowing the difference between payday loans and personal loans to decide which is best suited to you.

With this in mind, let’s see what’s involved with each option.

Payday loans.

When you’re strapped for cash, a payday loan (also known as a small-dollar loan or a payday advance) can seem like a quick fix to tide you over to the next payday. These loans can often be organised very quickly, sometimes over the phone or online. The downside is high fees and charges including very high-interest rates. These costs can quickly add up, potentially leaving you worse off financially.

Here’s a guide to what you can be asked to pay.

For payday loans of $2,000 or less, you’ll usually have anywhere from 16 days up to 12 months to repay the debt. The credit provider can charge a variety of fees1;

  • A one-off establishment fee of not more than 20% of the loan amount.
  • A monthly account keeping fee of up to 4% of the loan amount.
  • A government fee or charge.

So, if you borrow, say, $2,000 to be repaid over 12 months, you could end up paying back a total of $3,3602.

For payday loans between $2,001 and $5,000, you can be asked to pay a one-off fee of $400 and a maximum annual interest rate of 48%3.

The risk of a debt spiral.

Not only are payday loans expensive, they can lead to a worsening debt spiral. If you’re likely to be short of cash the following month, it makes it even harder to keep up the loan repayments. If you miss a payment (known as defaulting), you could face additional loan costs imposed by the lender.

In this way, what started out as a small payday loan, can blow out to an unmanageable debt. This can bring considerable stress and the possibility of financial hardship.

Personal loan.

The beauty of a personal loan is that you’ll pay a lower rate and much lower fees compared to a payday loan. The repayment periods are often longer too, which helps make the repayments more manageable.

With a Defence Bank personal loan, you have a choice of loan terms - from one to seven years depending on the size of your loan. This lets you shape the repayments in line with what’s comfortable for you and your lifestyle.

What’s really exciting about a Defence Bank personal loan, is that you have the flexibility to make fee-free extra repayments. So, if you have spare cash, you can pay off the loan sooner and save on interest costs.

If you need to access those additional payments later on, it’s not a problem. Unlike many other lenders, Defence Bank offers free redraw on most of our personal loans (except debt consolidation loans), so you can draw the money back out if it’s needed in an emergency.

Before you consider a high-interest payday loan, you can count on Australia’s Defence Bank to talk you through your personal loan options - a quick chat may save you a lot of money. Call our Contact Centre on 1800 033 139, or visit your local branch to find out more.

Got questions? We have the answers. See our FAQs.

 

1 https://asic.gov.au/for-consumers/loans-and-credit-cards/
2 https://moneysmart.gov.au/loans/payday-loans
3 https://asic.gov.au/for-consumers/loans-and-credit-cards/

 

Important note: This information is of a general nature and is not intended to be relied on by you as advice in any particular matter. You should contact us at Defence Bank to discuss how this information may apply to your circumstances.

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