Personal Loans vs Payday Loans

Find out how each of these loans works and which personal finance option is best for you right here with Savvy.

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, updated on October 4th, 2023       

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When it comes to flexible sources of financing, there are few options as effective and popular as personal loans and payday loans in Australia. Both are essentially able to be used for whatever you like and can be applied for and approved quickly from the comfort of your home.

It’s important to understand the differences between these two types of loans before you apply, though, as you’ll find that they’re more different than you might think. Compare the two right here with Savvy to find out which one best suits your needs today.

What are personal loans and how do they work?

Personal loans are a type of finance that allows you to borrow any amount from $2,000 up to $100,000 over a term of between one and seven years. You can select whether to pay these on a monthly, fortnightly or weekly basis depending on which suits you as a borrower.

As well as choosing your loan amount and term, borrowers are also able to decide whether to take out a loan with or without security. Unsecured loans sidestep the requirement for security and are more widely available as a result, with more borrowers eligible overall. Those who can supply an eligible asset may use a car, boat, caravan or another vehicle as collateral for their loan, increasing their borrowing range and reducing their interest rate.

You can also compare different types of interest rates. Fixed interest is offered by almost all lenders, which locks your rate in at the beginning of your loan and keeps it in place throughout your agreement. This facilitates more accurate budgeting and carries a degree of financial certainty as to how much you’ll pay each month. Variable rates are open to fluctuation, and while they can allow you to save when rates fall, they’re typically offered at higher base rates.

What are payday loans and how do they work?

Payday loans are a different type of financing that offers small loans from $300 to $5,000 and repayment terms as short as 16 days up to two years.

Perhaps the most notable aspect of payday loans is that they’re faster and easier to obtain than personal loans. First and foremost, lenders offering these products aren’t as concerned with the credit score of borrowers, with their primary focus being their ability to repay their loan in the here and now. This makes them an appealing option for those who’ve struggled with credit in the past and don’t meet the eligibility criteria for standard personal loans.

Like many personal loans, though, there aren’t any costs associated with paying out a payday loan early. This flexibility allows you to cut down on the potential cost of your loan by paying above the minimum when you’re able to do so. This serves as an incentive for borrowers to pay off their loans quickly and remain comfortably on top of their repayments.

What do personal loans and payday loans cost in Australia?

There’s a variety of different costs that you may encounter on your loan, whether that be personal or payday. It’s crucial to be aware of the price breakdown for each loan type, which is as follows:

Personal loans

The primary cost factor on personal loans is interest. This is a rate which is calculated based on your remaining loan sum each day, which is then added up and charged on top of your principal repayment for every instalment. This means that the more you pay, the less interest you’ll be charged. In addition to interest, there are several fees which can be charged to your loan (although some lenders won’t charge one or more of these), which are:

  • Ongoing account fees: $0 to $10 each month
  • Establishment fee: $0 to $595 one-off charge
  • Early repayment fee: $0 to $600+ depending on time left to run on your loan
  • Late repayment fees: $15 to $35 for each late repayment

Payday loans

The costs associated with payday loans are more simple than personal loans due to the fact that they don’t come with any interest. Where these loans make their money is through two primary fees: the establishment fee and monthly fees. Establishment fees are capped at 20% of your loan amount up to $2,000 and $400 for loans above that sum, while monthly fees are charged up to 4% of your loan up to a maximum of 48% per year above $2,000.

The differences between personal loans and payday loans

Cost structure

While personal loans are based on interest and fees, payday loans only charge capped fees. However, the proportional cost of these fees is greater on a payday loan, with establishment and ongoing costs charged as a substantial percentage of your loan amount.

Loan amount and length

Unsecured personal loans can grant you a borrowing range up to as much as $75,000, which far exceeds payday loans ($5,000), but the minimum of $2,000 is higher than the $300 you can potentially borrow from a payday lender. You can also take between one and seven years on a personal loan compared to 16 days to two years.

Loan security

You don’t have the option to supply an asset to secure your payday loan, which you can do with a personal loan. This serves as collateral, meaning your lender will be able to sell it to recoup funds in the event you’re unable to repay your loan in full.

Processing speed

Personal loans can be approved within 60 seconds and have funds sent to you within 24 hours, making them fast and simple. They don’t have a patch on small loans, though, which can be approved and sent through to you in the space of just one hour.


A good credit score and stable employment is a prerequisite for taking out a standard personal loan, but not for payday loans. These lenders will want to guarantee that you can support your repayments comfortably, after which you can be approved for your loan.

Diversity of lenders

Personal loans are offered by all different types of lenders, from banks to credit unions to private online lenders. Cash loans, on the other hand, are only available from lenders operating exclusively in the online space, giving you fewer options to choose from and effectively none if you’re looking to arrange your loan in person.

Common questions about personal loans vs payday loans

Will applying for either of these loans affect my credit score?

Yes – as soon as you sign onto your personal or payday loan, it’ll be recorded on your credit file. From there, whether you make your repayments on time or not will shape whether your credit score rises or falls. If your repayments are prompt and made in full, you’ll increase your score across your term until its conclusion, but not doing so will have the opposite effect. It’s important to note that you can receive an indicative interest rate from your personal loan lender before submitting your formal application which isn’t marked on your credit file.

Can I always be approved for the maximum loan amount and term?

No – the amount you’re approved for will be wholly dependant on what your lender believes you’re capable of repaying based on factors such as your income, expenses and credit score. If you’re applying for a loan with $500 monthly repayments and you only have $1,000 in monthly disposable income, for instance, you wouldn’t be approved, as your payments would take up too great a proportion of your available funds. You can work out your personal loan borrowing power with our calculator.

How should I compare personal loans?

There are several areas you should look to assess when comparing personal loans with Savvy, such as:

  • Interest rates
  • Fees
  • Repayment flexibility (ability to make free additional payments)
  • Available loan terms
  • Minimum and maximum borrowing range
  • Security requirements
  • Type of interest rate
How much will a $2,000 loan cost?

This will vary depending on the type of loan you choose. For this example, a loan term of 12 months, interest rate of 15% p.a., establishment fee of $350 and monthly fee of $5, a $2,000 personal loan would cost around $2,600 to repay overall.

For a 12-month payday loan, a $2,000 sum would come with an establishment fee of $400 and monthly fee of $80, leading to an overall cost of $3,360. This is over $700 more than the personal loan, even with its high interest rate.

What should I use these loans for?

Because neither of these comes with any restrictions on how they can be used, the sky is essentially the limit on how to distribute your loan funds. You might wish to use your personal loan for a larger financial commitment such as consolidating debts, improving your home or paying for an expansive holiday. Smaller medical costs or educational expenses can also be covered. Small loans are often used for emergency expenses, such as car repairs or other costs around the house.

Should I just use my credit card instead?

You could – credit cards are useful in that they can be utilised whenever and wherever you like. However, while they’re convenient for smaller purchases that can be easily paid off, where you might prefer a loan is when the amount you need to access is greater than what you’re capable of repaying within the month. This is because credit cards come with high interest rates that are charged on outstanding balances that outlast the interest-free period, potentially costing you a significant amount overall.

What documents will I need for a personal loan?

The documents that you’ll need to submit as part of your personal loan application are:

  • Your last two payslips (90 days of bank statements and employment contract may be required)
  • Photo ID such as your passport and/or driver’s licence
  • Details on any outstanding debts or other liabilities
  • Proof of address via a utility bill may be requested
  • Internet banking account information
Can I get approved at any time of day?

Yes – however, that doesn’t necessarily mean you’ll receive your funds at any time of day. Much of the approval processes for both personal and payday loans are automated, meaning that you can be approved for financing and know that the funds will be there for you once your lender can send them through. This can take place on a 24/7 cycle.

Helpful personal loan guides

Compare personal loans today

We’re here to help you find the most affordable options, so there’s no better way to compare personal loans and rates than right here, all in one place.