Payday loans vs personal loans

If you need to borrow money, you may be considering applying for a payday loan or a personal loan. But what is the difference between the two? And what do you need to watch out for?

In this article:

What is a payday loan?

A payday loan, also called a small amount loan, is a loan of up to $2,000. You have between 16 days to one year to repay the loan.

Lenders can’t charge interest on payday loans, but they can charge fees. According to Moneysmart, most payday lenders charge an establishment fee of 20% of the amount borrowed and a monthly service fee of 4% of the amount borrowed. This is the maximum amount lenders can legally charge. So if you took out a $2,000 loan, this means you could pay up to a $400 establishment fee and up to a $80 monthly service fee, plus your regular repayments to pay off the loan.

Lenders can also charge government fees or charges, default fees or charges (which cannot be more than double the amount borrowed) and enforcement expenses (which are the costs of going to court to recover the money owed).

What is a personal loan?

A personal loan is typically used to pay for important life events and other big expenses, such as buying a car, wedding, holiday and home renovation. They may be taken out for a larger amount of money and usually have a longer repayment period, typically between one and seven years.

Lenders charge interest on personal loans, which can be a fixed or variable interest rate. They can also charge a range of fees such as application fees, monthly service fees and default fees. Personal loans can also be secured by an asset (such as a car) or unsecured.

What is the difference between payday loans and personal loans?

Generally, payday loans can be riskier and more expensive than other types of loans. Researching the fees, interest rates, contract terms and risks that can apply is important with this in mind. There are a couple of major differences between payday loans and personal loans, including the loan amount, cost, repayment period, which lenders offer them and eligibility criteria that apply. Here is a summary:

Loan amount

Payday loans are for amounts up to $2,000, while personal loans can be available for larger amounts.

Costs and fees

Payday loans can be considerably more expensive than personal loans. Lenders cannot charge interest on payday loans; however, they can charge high fees. With personal loans, lenders can charge both interest and fees. On a payday loan, the National Debt Helpline warns some lenders may charge default fees of “up to twice the amount you borrowed” , plus late payment fees of $7 per day. Personal loans rates may be advertised in a range by lenders. If you have a good credit score, you may be able to score a better deal and interest rate than if you have a low or poor credit score.

Repayment period

Payday loans have a repayment period of between 16 days to one year. Personal loans typically have longer repayment periods of between one to seven years.


Payday loans are typically available from non-traditional lenders. Personal loans are offered by traditional lenders such as banks, credit unions and building societies, as well as alternative lenders such as peer-to-peer lenders.

Eligibility criteria

Payday lenders may offer more flexible eligibility criteria. For example, you may be able to apply for a payday loan if you have a bad credit history or are receiving Centrelink payments. Payday lenders often say they will look at your individual circumstances as a whole, including your income, expenses and existing loans. In comparison, personal loans typically have stricter eligibility criteria. For example, some lenders require you to have a good credit history and be earning a certain amount of money.

Speed of approval

Many payday lenders offer ‘fast loans’ and aim to approve the loan application and send the funds as quickly as possible, such as on the same day. Some personal loan providers offer a same day turnaround for existing customers, but in other cases it may take a few business days.

Moneysmart says that if you need to get money fast, there may be cheaper options than a payday loan. For example, you might consider a no interest loan or an advance Centrelink payment. You can also seek free professional advice from a financial counsellor if you are experiencing financial difficulties or would like some support with managing your money and expenses. You can call the National Debt Helpline on 1800 007 007.

What is the cost difference?

Below is a more detailed look at the cost of a payday loan versus a personal loan. In this example, we have compared a $1,000 loan repaid over a one-year period. For the payday loan, we have assumed the lender charges the maximum fees allowed. For the personal loan, we have assumed the average interest rate and fees for unsecured loans in our database.

In this example, a payday loan costs the borrower $680 in fees. In comparison, an unsecured personal loan costs the borrower $240.29 in interest and fees. Overall, the unsecured personal loan in this hypothetical example is $439.71 cheaper over 12 months.

Payday loan vs unsecured personal loan – borrowing $1,000 repaid over 1 year

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Repayment term
12 12
Interest rate 0% 10.91%
Monthly repayment
(plus monthly fee)
$123.33 $103.36
Loan establishment
$200 $170
Monthly fee $40 $0*
Total cost
(interest and fees)
$680 $240.29

Source: – 28/05/2021. Payday loan example based on the maximum fees and/or interest rate allowed by ASIC for loans of $2,000. Personal loan example based on the average rate and establishment fee for unsecured personal loans available for $3,000 and a term of 1 year in Canstar’s database. For both payday and personal loan examples, the repayment calculations assume the establishment fee is added to the loan balance and therefore accrues interest, where applicable. *The assumption of no ongoing fee for the personal loan example is based on the observation that the majority of these loans in Canstar’s database do not charge ongoing fees. Some personal loans do charge ongoing fees.

Before applying for any type of loan, it’s important to carefully consider the costs involved and make sure you will be able to afford the repayments.. You may want to try our Budget Planner Calculator or download the new Canstar app (powered by Frollo) to help you manage your day-to-day finances. If you are interested in a personal loan, Canstar’s Personal and Car Loan Star Ratings reveal products that offer Outstanding Value based on cost and features. You can also compare personal loans using Canstar’s comparison tables.

Consumer note: If you apply for either a payday loan or personal loan, this will be recorded on your credit report. If you make a number of applications in a short space of time, this may negatively impact your credit score. Additionally, if you miss your repayments, this will also be recorded and could damage your credit score. Having a poor or low credit score can affect you for some time, limiting your ability to borrow money and making you less creditworthy to lenders.

→ You can check your credit score for free

Cover image source: mojo cp/

Thanks for visiting Canstar, Australia’s biggest financial comparison site*

This content was reviewed by Sub Editor Jacqueline Belesky and Finance and Lifestyle Editor Shay Waraker as part of our fact-checking process.

Tamika covers personal finance for Canstar, specialising in banking and general insurance. She joined the team after completing a Bachelor of Journalism and Bachelor of Laws (Honours) at QUT. She has previously written for a range of news, music and arts publications.

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