Personal Loans vs Payday Loans: Choosing The Right Option For You
They may look like they offer the same thing, but don't be fooled - payday loans and personal loans are quite different. Both are viable options if you need to fund a purchase, but it's best to know all of your options before you decide.
All in all, there are three main differences between payday loans and personal loans: the amount you can borrow, the interest rate and the timeframe for repayment. Payday loans offer smaller loan amounts, far higher interest rates and much shorter repayment periods than personal loans
Read on to learn more about personal loans and payday loans in Australia, so you can compare and see which option is best for you.
Key Things To Think About Before You Take Out A Loan
Before you begin on your financial journey it's important to question the reasoning behind your need for a loan. Check out the below options before you decide:
- Do I really need this? Think about the real reason you need this loan. Is it worth the repayments? Is it necessary?
- Can I keep up with the repayments? You must make sure you can make the scheduled repayments on your chosen loan. Once you have taken on the loan, you have to make these payments, so think about how the loan will affect you in the long term and whether it's worth the short term benefit.
- How will this affect my credit rating in the long term? Think about the potential impact that taking out a loan may have on your credit rating, especially if you think there's a chance you may not be able to keep up repayments. A default will stay on your file for five years and can reduce your ability to gain lines of credit or get approved for other services such as mobile phone plans.
- Have I exhausted all my options? Do you have any friends or family members you can rely on in your time of need? Sometimes all you need is a helping hand.
- Have you spoken to your creditor? If you owe money and can't make the repayment, sometimes it's easier to set up a payment plan with your creditor. Paying in smaller instalments can help you manage your debt more effectively than taking out a loan.
- Is there any government help available? If you are on government benefits, you can ask for an advance from Centrelink if you are in need.
How do Personal Loans & Payday Loans work?
A payday loans are short-term, high cost loans that can provide consumers the money they need to get by until their next pay cheque. They are designed to be a short-term solution for borrowing small amounts.
Applying for a payday loan is easy, with lenders asking simple questions about your job status and income sources before making a decision on the loan amount. You may also need to give them access to your bank account, or submit a post-dated cheque for the loan amount, including a finance fee, that comes out after your next pay date.
A personal loan is straightforward in that it is the process of borrowing a specific amount of money from a lender, and then repaying the loan in equal repayments over a longer period of time than payday loans, usually between 2 to 5 years. On average, personal loans are cheaper than taking out a credit card as they offer far lower interest rates, and they can be paid back before the scheduled time. You can also make extra repayments outside of the scheduled payments on a personal loan. This shortens the lifespan of the loan, which in turn decreases the amount of interest paid.
An unsecured personal loan is one where the lender requires no security on the debt, so if your loan is unsecured it means that it is not backed by any personal assets like a home or vehicle. A secured personal loan, on the other hand, requires you to provide an asset as a guarantee. This asset can then be possessed by the lender in the circumstance that you are unable to pay off your loan so that they can sell it to cover the costs of your loan. Both secured and unsecured loans may offer an interest rates according to your credit rating.
What are the Differences Between Personal Loans & Payday Loans?
The main differences between the two loan types are:
- Rates over time. With a variable rate personal loan the amount of interest charged reduces over time as you can only be charged interest on the outstanding loan amount, whereas with a payday loan the amount increases. With a fixed rate personal loan, the interest remains the same for the duration of the loan.
- Interest and Fees. Personal loan interest rates range from around 6% to 23% p.a. Payday loan interest rates vary greatly and are capped at 48% p.a. for loans over $2,000 but can be subject to charges as high as 20% of the loan amount. This can make the true cost of the loan extremely high.
- Charges. Payday lenders can add charges for a number of things, while personal loans are fixed and sometimes secured by your personal items.
Payday Loan Pitfalls
If you don't pay off the loan in its entirety by the due date, you'll be hit with additional fees and finance charges - and this is the real crux of how payday loans work and can result in borrowers finding themselves in an out of control 'debt spiral'. It is imperative that you read the small print. Know what you are signing on to before you get into a contract you can't easily get out of.
Are payday loans a bad option? Well, if you're short now, there's a possibility that you'll be short next month too, and the high fees and charges that come with payday loans can create a cycle of debt that is hard to get out of. If you don't have any credit cards or savings, a payday loan can seem like the easiest way to get cash quick - but doing so is taking a huge risk with your finances.
Laws Regulating Payday Loans Explained
Laws relating to payday loans changed in 2010, with new regulations to try to help those taken advantage of bad payday lenders. Since these changes came into effect, payday lenders now cannot take security for the loan, and must review 90 days of bank statements from the borrower before granting the loan. Also, repayments on a payday loan cannot be more than 20% of your income if you receive 50% or more of your income from Centrelink.
Can I Get a Payday Loan on Benefits?
It is possible to get a payday loan on benefits. However, it is important to remember that you will be paying back a lot more than you are borrowing, and there may already be processes in place to help you with your money issues. If you're eligible for Centrelink benefits, you may be able to apply for an interest-free advance payment on your benefits.
Alternatively, a low interest personal loan will offer you both a great low rate and piece of mind knowing that you'r fixed repayments are going toward the interest and the principal, helping you to pay down your debts faster.
Before you consider a high interest payday loan, get an obligation-free quote from SocietyOne & find out the rate we can offer you on a personal loan.
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