Whether you need a short-term cashflow solution or have some big ticket purchases in mind, find out when it’s better to use a credit card or a personal loan
Personal loans and credit cards are both useful sources of finance, but the right option for you will depend on what you need the money for, your ability to repay the debt and the features you’re after. While a credit card provides interest-free terms for the purposes of debt consolidation, a personal loan is better if you need cash rather than available credit. Personal loans are also suited to specific purposes such as purchasing a car or for funding a holiday.
If you’re tossing up your options between getting a credit card or a personal loan, use the following guide to help you decide which one will work best for you.
Compare credit cards vs personal loans
When should I use a personal loan over a credit card?
Jim is in debt
Jim has been living large. He owes $2,500 across two credit cards and has another $2,000 owing on a personal loan. Jim can consolidate the debt using either a credit card or a personal loan so that he has just one repayment rather than three.
Although there are personal loans suited specifically for the purposes of debt consolidation, Jim can get an interest-free balance transfer credit card for terms of up to 20 months if he applies for the St.George Vertigo Platinum Credit Card. By comparison, the CUA Fixed Rate Personal Loan offers interest rates from 11.99% p.a. for terms of up to seven years.
The credit card option includes interest-free balance transfers for as long as 20 months. Jim thinks he can pay off his debts in this time so he opts for the credit card rather than a the personal loan. If Jim wasn’t able to pay off his debt within a year, he would compare personal loans instead of balance transfer credit cards, as once the interest-free period is over on a balance transfer credit card the interest rate becomes much higher than that of a personal loan. A personal loan becomes a cost effective option for Jim if he can’t pay back the credit card by the end of the promotional term.
Lisa’s European getaway
Lisa has been planning a trip to Europe for some time now. She’s been saving for months but still doesn’t feel like she has the cash she needs to really enjoy the experience. Lisa already has a credit card, but due to the high costs involved when using it for cash, she want’s to avoid using it if she can.
St. George is her everyday bank so she decides to take out the St. George Get Set Loan. This is an unsecured personal loan from St. George. The bank deposits the money in Lisa’s account and she can use it for whatever she likes while only paying interest (13.75% p.a.) on the funds she uses.
She chooses a personal loan over a credit card because credit cards are not designed to be used to access cash from an ATM and she will need access to cash as well as credit when she’s overseas. If Lisa were to use her St.George Amplify Platinum Visa Credit Card to make cash withdrawals in Europe, in addition to international ATM withdrawal charges, she’d be stung with the cash advance fee of 2% of each cash advance amount and all transfers or minimum of $2 and the cash advance interest rate of 20.24% p.a.
Due to cash advance charges, a personal loan is a cost effective option for Lisa when she’s on holiday. Using a personal loan, she only pays the international ATM withdrawal charges when she gets cash from the ATM.
Harry’s new wheels
Harry has just started work and wants to purchase a new car. He needs about $20,000 so he can buy a second-hand vehicle. In this instance, a car loan is a far better option for Harry than a credit card. It’s unlikely that a financial institution such as a bank will approve Harry for a limit of $20,000 considering he has just started working. However, car loans are secured loans. The vehicle is the security for the lender and can be repossessed if Harry defaults on his loan payments. Subsequently, the interest rate is lower than an unsecured personal loan and most credit card interest rates. Harry can be approved for a higher limit because the lender has an asset that they can repossess if Harry can’t make his car loan payments.
What to consider when comparing a credit card to a personal loan
- Cash or credit? Personal loans are better if you need cash, but due to interest-free days, credit cards are ideal for making purchases with credit. Using a credit card for a cash advance (for example, at the ATM) is one of the most expensive ways to get cash. Consider the charges you’ll pay when you go to the ATM, including the cash advance fee, a higher interest rate and ATM charges. Only one interest rate applies to a personal loan regardless of how you access the funds.
- Debt consolidation. Credit cards have a money-saving debt consolidation feature called a balance transfer. Debt consolidation balance transfers include interest-free periods for an extended amount of time. Debt consolidation personal loans generally provide a low rate of interest, but not as low as 0%. Balance transfer credit cards do revert to a high interest rate at the end of the promotional period, but a balance transfer credit card can save you more money than a personal loan if you can pay down your outstanding balance before the end of the interest-free period.
- Your ability to repay. How long do you need to repay the money you spend? Personal loans have terms of up to seven years. A credit card may be able to provide short-term savings, but once the introductory period is finished, the ongoing interest rates are higher than what you can get on a personal loan. Think about whether you can repay what you spend within the credit card promotional period, and if you can’t, a personal loan may be a more suitable option for you.
Personal loans and credit cards both have a purpose, but it’s important to know when to use which product. If you have any questions about using credit cards or personal loans, get in touch with us using the form below.Back to top