Credit card or a personal loan – which is better?
If you find yourself in the position where you need a boost to your finances, then you have two main options of credit cards or personal loan. Both can provide you with the money you need, but you have to consider their specific differences to know which one is right for your particular circumstances.
Low Interest Rate Personal Loan
Consolidate your multiple debts (credit cards, car loans, student loans and other personal loans) into one low interest loan.
- Interest Rate From: 14.69% p.a.
- Comparison Rate: 15.55% p.a.
- Interest Rate Type: Variable
- Application Fee: $0
- Minimum Loan Term: 1 year
- Maximum Loan Term: 7 year
- Minimum Loan Amount: $5,000
- Maximum Loan Amount: $50,000
Comparison of Personal Loans
What are the pros and cons of personal loans?
These are the basics of a personal loan that should form a checklist for you to decide whether it suits your needs
- Personal loans start at around $3000 and carry on up and up past $100,000.
- Personal loans, when compared to credit cards, usually have a lower interest rate over the life of the debt
- This is because personal loan repayments are at set monthly amounts, whereas people can choose how much they repay of a credit card debt (above the minimum amount), meaning they can drag their heels and cause the overall cost to be far higher.
- Personal loans start building interest immediately. There are no interest-free days as there are with credit cards, where you have a grace period of 44 or 55 days provided you are not carrying over a balance from the previous month. However, this is pretty irrelevant when dealing with the amounts mentioned above, which would be difficult for most people to repay in one fell swoop – a necessity to benefit from interest-free days.
- With many personal loans, you could be charged a fee for repaying more than the fixed monthly repayment or for clearing the debt in full before the agreed time.
What are the pros and cons of credit cards?
- As with personal loans, how much credit is extended to you will depend upon your financial circumstances (income, assets, expenditure, other debt), and the state of your credit rating. Financing on a credit card is good for smaller purchases, but you must bear in mind that a responsible repayment plan is up to you, and not sticking to one can mean that a higher amount personal loan could cost you less in the long run (due to the fixed repayment schedule).
- The open-ended nature of a credit card debt may suit those whose finances are very fluid, where a fixed repayment amount each month could cause difficulties.
- Your line of credit with a credit card is renewable. As you repay your debt, more credit becomes available to you within your set credit limit.
- Credit cards offer interest-free periods that mean you can avoid any interest charges if you always pay off your balance in full each month.
- Introductory interest rate offers are common on credit cards, more usually for balance transfers but sometimes also for purchases. These can help ease the interest burden, but again, you must be disciplined and self-impose a rigid repayment plan to take advantage of them.
- Credit card debts will usually cost you more in the long term. A personal loan and a credit card of the same amount at the same interest rate will only work out equally if you apply the same fixed repayment schedule to your credit card debt as is imposed upon you by a personal loan.
Situations where it might be better to choose a Credit Card rather than a Personal Loan
A fallen interest rate
It was found by Datamonitor that while the normal (average) credit card rates fell by 210 basis points between August 2008 and April 2009, the mean of bank home loan rates fell by 380 basis points. Personal loan rates were found to fall far short of this. Times have changed, and with so much competition, credit card interest fees have dropped by quite a bit and now rival those previously offered by personal loans. In contrast personal loan rates have remained quite static although their repay rates have dropped and become more flexible recently. Credit cards now can have a long term purchase rate of only 13%.
Deals, benefits and promotions
As mentioned above, competition has assured that there are excellent deals on offer today for balance transfers as well as purchases done on your credit card. As evidenced by the many online credit card and banking comparison websites freely available today, you will find some cards have very low interest rate, or even 0% interest charged for anything from 3 to 12 months. You can also choose the balance transfer option, which might get you another good deal with little or no interest for a further few months. So is a credit card better than a personal loan? Yes, it might very well be if you want to repay the loan within a shorter time period and ensure that the loan is repaid or transferred before your card’s promotional low or zero interest period expires.
Personal loans have no grace period of payback, interest accrues immediately and you have to pay back on a fixed schedule. You commit to an agreed upon amount, a fixed repayment rate and an amount of time allowed for the repayment of the personal loan. You will also most often have to pay a penalty if you pay off the loan quicker than expected (usually based on the amount of interest lost between your early full payment and the agreed upon date for the loan repayment). This is not the case with a credit card. With credit cards you have better and greater flexibility to choose your times and rates of repayment, you can transfer the balance of the debt or repay it in full without incurring a penalty. This make a credit card better than a personal loan in most instances except perhaps when buying really expensive items totalling in the hundreds of thousands, for example cars or homes.
Personal Loan or Credit Card
Here are some of the most common reasons people are looking for credit in Australia. By reading through these reasons, you may isolate the kind of credit that would work for you.
1. To make a purchase
Sometimes, you may need to make a big purchase out of the blue and don’t have the money available for it. An example of this would be if your car broke down and needed some major repairs immediately so that you could have transportation to work.
If you feel that you will be able to pay back the amount within a year’s time, you would be well advised for getting a credit card that offers a 0% interest rate on purchases. You would have to make sure that the introductory rate lasts for at least a year if that’s how long you need to pay back the loan. If you feel that it would take longer than the promotional time period that is being offered, you can look for a credit card with a low standard rate of interest. Keep in mind that the lower the rate, the less you’ll have to pay for interest over the year.
If you need more than $3000 and you know that a year is not long enough to pay back the entire amount, you should be looking at a personal loan. You may not qualify for a $3000 limit on a credit card with a low interest rate.
2. To get cash to make it through the month
A lot of people are struggling to make it through each month. Sometimes emergencies arise and money needs to be pulled from the food or rent budget to handle them. A lot of Australians turn to payday loans as a quick fix to handle the necessities of life for the month.
Payday loans should be avoided at all costs. They charge an extremely high interest rate and you will have to pay them off in full with your next paycheque. This may put you back in the same position for the next month and you will have to get another payday loan to get through it.
A credit card can be a worthwhile option in these extreme situations. You will be given a grace period on most cards that typically gives you up to 55 days to pay back the money without incurring any interest. If you can’t pay it all back in a month, you won’t have to pay the high interest rates of a payday loan if you find a card with a low rate of interest.
3. For debt consolidation
A lot of people realise that they are too far in debt and that consolidating their debts would be ideal. If you only have credit card debts, one choice would be to consider a balance transfer credit card. You can consolidate all of your card debts onto one new card with a very low interest rate. Some cards will give you a 0% rate for six months for the balance transferred. Other cards will give you as long as you need to pay off the balance at a very low rate.
If you have other debts including credit card balances that remain unpaid, you may want to consider getting a personal loan. You just need to make sure to find a loan that has a better interest rate than what you are paying now on your debts.
If you have decided that a personal loan is for you, you’ll have to decide between an unsecured or secured loan. With a secured loan, you will have to put something up as collateral. In most cases this is a house. A secured personal loan will give you a better interest rate, but you are risking losing your house if something goes drastically wrong. The bank will have the right to take your house away if you default on your personal loan.
Unsecured loans will charge you a higher rate of interest but you won’t have to put anything up in the form of collateral. At the same time, you will have to qualify for this kind of loan. If your credit rating is suffering from your debt situation, you may not get approved for a personal loan without it being secured.
The ideal types of credit cards for borrowing in the situations mentioned above are low rate cards for purchases or balance transfers. Don’t look for any cards that offer rewards programs since they usually come with a higher rate of interest. You should not be focused on collecting points as much as getting your debt paid off. You can get a rewards card later on once your debt has been handled.
In most cases, it is better to use a credit card as a repayment strategy than to get a personal loan. Credit cards are easier to apply for and you can find out in about 60 seconds whether you have been approved or not if you apply online. If you need a rather large amount, however, you may be better off getting a personal loan. Your decision will also be based on what you need the money for and the kind of debts you need to repay.
To give you an idea of what a great credit card looks like, you could check out our best credit cards comparison* where we highlight some great features across a range of cards.”Back to top