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Choosing between a credit card or personal loan

08 November 2022
• 4 minute read
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Do you have some big life plans that require more cash than you have on hand? Or perhaps you’re looking to consolidate debt? If so, what should you do? Is your first thought to apply for a personal loan? Or would a credit card be a better option? Read on to discover the difference between these two ways of gaining access to money and choose the right one for you.

Personal loan vs credit cards

Both options allow you the funds to pay for big-ticket items, but in different ways.
A personal loan will give you a lump sum of cash for major purchases like a car or holiday. They’re also useful for the not-so-nice things in life like medical or dental bills.
Credit cards, on the other hand, give you access to an ongoing line of credit. This offers peace of mind for when life throws curveballs at you. For example, if you needed to make an emergency trip home, could you quickly buy a plane ticket without worrying about where to find the money? While a credit card won’t take the stress out of life, it can at least remove the financial component temporarily.
Both a personal loan and a credit card have their advantages and disadvantages. Understanding them will help you decide what you need and what best fits your current situation.

How do personal loans work?

If approved for a personal loan, you will need to repay the loan over time, including accrued interest. This interest amount can change depending on whether you have a fixed or variable interest rate. You can determine the length of the loan, paying it back over five or seven years for example, so you can easily budget it into your life.
If you’re looking for a more detailed explanation of personal loans, you can read through some FAQs right here.

Here are some things to consider when looking to apply for a personal loan.

Repayments and interest rates

Determine what you can afford to repay. If you want to know with certainty how much your repayments are going to be, a fixed interest loan is the way to go. By contrast, if you’re happy to take the chance on a rate that might go up or down depending on market conditions, you should consider a variable interest loan.
It’s also worth noting that some banks offer personalised interest rates, and customers with good credit scores are rewarded with lower interest rates.
Check out our personal loan calculator where you can see what your repayments might be on a monthly, fortnightly, or even weekly basis.
If the results look beyond your means at first, try adjusting the loan amount and repayment frequency to see if you can come up with an affordable solution.

Fees and charges

It’s a good idea to consider any fees and charges associated with a personal loan. Make sure you always check out the Key Fact Sheets to understand what these might be.

What is a credit card, and how do they work?

A credit card is similar to a personal loan in that it gives you access to money, but is different because it can serve as an ongoing source of extra funds up to the card’s credit limit. For example, if you have a $2,000 limit credit card, and you pay off the balance in full every month, you can repeatedly ‘borrow’ up to your limit of $2,000.

Flexible borrowing

A credit card offers a line of credit, which is an amount of money you can ‘borrow’ and pay off either immediately or over time. Interest will be paid on any amount of the ‘loan’ which has not been paid off by the repayment due date.

Repayments and interest rates

Generally speaking, repayments are made monthly, and interest is charged on any credit amount remaining to be paid off.
If you spent $1,500 on your credit card and managed to pay all $1,500 off by the end of the month, you’d incur no interest as there would be a zero-dollar balance.
Having a credit card is good if you can keep the repayments steady and the amount on loan under control. However, interest rates do tend to be higher on credit cards.

Fees and charges

When considering a credit card to consolidate debt, you should look out for those with low annual or balance transfer fees.
Additionally, make sure you always check out the Key Fact Sheets to understand any fees and charges payable, so that there are no nasty little surprises once you have the credit card.

What are the benefits of paying with a credit card?

Credit cards are great to help with purchases you may need to make unexpectedly. You won’t be caught short at the supermarket or if you suddenly need a new water pump for your car.

If you’re confident you can make the repayments, credit cards can be handy for such emergencies.

The verdict

It’s important to understand that whichever choice you make will involve going into debt. The key is to select a product with features to help you pay off your debt quicker.
So, if you’re in the market for a personal loan, look for things like a $0 monthly account fee, the ability to make unlimited extra repayments without penalty, and no penalties for early payout.
Similarly, if you’ve decided that a credit card best suits your needs, features like  balance transfers, longer interest-free periods on purchases, and competitive rates and fees will have you back in the black sooner than you’d otherwise be.

Important Information

Great Southern Bank, a business name of Credit Union Australia Ltd ABN 44 087 650 959. AFSL and Australian Credit Licence 238317. Conditions, fees and charges apply. This is general information and does not take into account your objectives, financial situation or needs.  Consider the appropriateness of the information, including the Terms and Conditions (T&Cs) booklet, before acting on it. The Financial Claims Scheme may apply to this product; refer to the T&Cs for more information.

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