Personal Loan or Credit Card?

March 11, 2021

If you need access to credit, there are a few options to consider. Which option you choose will typically depend on how you plan to use the funds you borrow, how you want to pay them back, and how disciplined you are as a borrower. Other factors may also come into consideration, such as the cost of borrowing, application efficiency and eligibility criteria.

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Sound complicated? It can be. Which is why it helps to know what to look for as you compare your options. In this post we’re going to compare two of the most common consumer credit products – personal loans and credit cards – to help make the comparison process, and your decision, that much easier.

What is a Personal Loan?

Let’s start at the beginning. What is a personal loan? With a personal loan, you borrow a set amount of money, which you are provided on approval as a lump sum. When you apply for a personal loan, you not only decide on the amount you want to borrow, you also determine the loan term – or in other words, how long you will need to pay it back.

Once you have received your personal loan, you can do with it as you like. For the most part, personal loans are flexible in this regard – although there may be things you can’t cover with your loan, such as business expenses and tax debts.

What is fairly inflexible, however, is your repayment schedule. Depending on the loan, you may repay the loan weekly, fortnightly or monthly, over a period of one to seven years. On top of the amount borrowed, you will pay interest at a fixed or variable rate, as set by the lender. You may pay one-off and ongoing fees, as well as incidental fees such as late payment fees.

Your lender may allow you to make extra repayments to pay off the loan faster. Doing this should also reduce the amount you pay in interest overall. Loans that allow for extra repayments may offer a redraw facility, giving you access to those extra repayments should you need it. Variable rate loans tend to offer more flexibility in this regard than fixed rate loans.

Once you have repaid the loan in full, the debt is cleared and your relationship with the lender is over.

Types of Personal Loan

There are a few different types of loan that fall under the personal loan banner. Let’s break them down.

  • A secured personal loan is secured against an asset. This asset is used as collateral, lowering the risk for the lender. Secured personal loans typically offer lower rates as a result, and can be easier to get approved for.
  • An unsecured personal loan is not secured against an asset. These loans can offer more flexibility for borrowers who don’t have – or who don’t want to put down – an asset as collateral.
  • A fixed rate personal loan has a fixed rate of interest applied throughout the life of the loan. Fixing a loan when rates are low can protect you against rate rises. And with a fixed repayment schedule, budgeting for repayments is much easier.
  • A variable rate personal loan has a variable rate of interest, which can change through the loan term. Opting for this type of loan could allow you to benefit when rates fall – but you will pay more in interest if rates rise. Variable loans are more likely to allow for extra repayments.
  • A standard personal loan can be used to fund almost anything. From home renovations and holidays, to weddings, dental bills and so much more.
  • A car loan is a type of personal loan designed specifically to fund the cost of buying a car. These loans are usually secured against the car, and as a result, offer lower rates.
  • A debt consolidation loan is a personal loan designed to pay off a number of other debts, such as other personal loans, car loans, credit cards and store cards. By rolling those debts into one loan, you could benefit from a lower interest rate, a set repayment schedule, and reduced stress levels as you deal with just one debt instead of many.
  • A payday loan is a short term personal loan that allows borrowers access to funds quickly, which are then repaid at their next ‘payday’. These loans typically come with much higher interest and fees than other types of personal loan.

What is a Credit Card?

So then, what is a credit card? Unlike a personal loan, which provides access to a lump sum that is to be paid off over a set period, a credit card provides a revolving line of credit that you can access whenever needed.

When you apply for a credit card, you are provided with a credit limit. This is determined by factors such as your income, employment stability, your creditworthiness, and your ability to repay. Using your card day to day, you can make purchases and cash advances, spending as little or as much as you like, up to your available credit limit.

At the end of each billing period, you will receive a statement, which details each transaction made using the card. The statement will include your closing balance, which is the total amount spent during the last billing cycle, plus any amount carried over from the last billing cycle. If you pay this amount in full by the statement due date, you won’t be charged interest on your balance.

Your statement will also include a minimum repayment amount. This is the minimum you must pay to keep your account current, and to avoid late fees being applied. If you only pay the minimum – or an amount between the minimum and your closing balance – interest will be applied to the remaining amount.

Types of Credit Card

Now, to the types of credit card. What options are there?

  • A rewards credit card earns rewards points on each purchase made using the card. Once you earn enough points, you can redeem them for rewards offered within the card’s rewards program. These may focus on travel, such as flights and accommodation, or gift cards and merchandise.
  • A premium credit card provides extras designed to create value on the card. Extras may include airport lounge access, flight upgrades, travel credit and travel insurance.
  • A credit card with low fees or no annual fee has a more basic offering, focusing on money-saving over features such as rewards and extras.
  • A low interest credit card is another card that focuses on keeping costs down, offering low rates that can appeal to cardholders who often carry a balance. These cards also tend towards the basic.

Personal Loans vs. Credit Cards

Having touched on all the need-to-know info on both personal loans and credit cards, let’s now compare the two, looking at all the factors that impact the comparison process.

Amount Borrowed

Personal loans typically offer loan amounts that range between $2,000 and $50,000, although some secured loans may offer larger loan amounts up to $100,000. The amount you are approved for will depend on factors such as your income and creditworthiness.

Credit limits applied to credit cards vary enormously, from a minimum of $500 on a basic card, to tens, or even hundreds of thousands of dollars on premium cards. Super high-end cards designed for the uber rich may offer credit limits that extend beyond that. The credit limit you are approved for will be determined by factors such as your history with the card provider, your income, and your creditworthiness.

  • Credit cards tend to work well when you’re funding a number of smaller purchases that you can afford to repay at the end of each month.
  • A personal loan is a better option when you have to cover one large purchase or lots of little purchases over a longer period – and you need longer to pay it all back.

Cost of Borrowing

When you apply for a personal loan, you are given a lump sum, on which you start paying interest straight away at a rate set by the lender. The interest applied to your loan will either be fixed or variable, with rates ranging from around 5% p.a. to 11% p.a. depending on whether the loan is secured or not, and whether the lender is online-only or a traditional bricks-and-mortar provider. The rate you pay will also be determined by loan amount, loan term and your creditworthiness.

The lender will also likely charge you fees on your personal loan. You may pay a one-off establishment fee, an ongoing fee, or both. Other fees may be charged on late payments and redraws.

With a credit card, you pay interest on your balance – or in other words, on the amount you spend on the card. Most cards offer a certain number of days interest-free on purchases, allowing you to avoid paying interest altogether, as long as you pay your closing balance in full by the statement due date. Interest rates on credit cards range from around 8% p.a. to 23% p.a.

In terms of fees, most credit cards in Australia charge an annual fee. While there are cards with no annual fees, most charge an annual fee in line with what the card offers in features and rewards. This may range from $25 to hundreds or even thousands of dollars. Other fees may include rewards program fees, late payment fees and over-limit fees.

  • Offering typically lower interest rates, personal loans tend to cost less in interest when you are borrowing larger sums over a longer period.
  • If you are a disciplined borrower, spending less and repaying your balance in full each month, a credit card could allow you access to revolving credit with no interest costs to worry about.
  • In terms of fees, you will always pay some kind of fee on a personal loan, whereas with credit cards, there are no annual fee options that allow you to keep both fees and interest costs at zero.

Flexibility

Personal loans are usually thought of as pretty flexible. You can choose how much you want to borrow, how long you need to pay it back, and how often you want to make your repayments. You can also use the loan for almost any purpose.

Credit cards are also flexible. You can use them to buy stuff day-to-day, putting down your plastic wherever Visa and Mastercard are accepted, both online and in person. You will have to make your minimum repayment each month, but there is no set repayment schedule to stick to.

  • Both personal loans and credit cards provide plenty of flexibility with regards to what you can use the funds for.

Application

When you apply for a personal loan, the lender will ask for detailed information regarding your finances and personal circumstances. The lender will then check your credit to determine whether or not to approve the loan. This process can be done 100% online, speeding up the application and approvals process.

Depending on the lender – and whether you hold other financial products with that lender – you could have your application approved in a matter of hours, to then enjoy same-day access to funds. Other lenders may take much longer to go through the application process, especially on secured loans.

When you apply for a credit card, you go through a similar approvals process, which again, is often done online. Once approved, you will typically have to wait a week or so to receive the card in the mail before you can start using it.

  • With the right lender, a personal loan could provide faster access to funds than a credit card.
  • Both personal loans and credit cards utilise a similar application process that can be carried out 100% online.

Eligibility

To be eligible for a personal loan, you will need to meet the lender’s specific eligibility requirements. Applicants typically need to be at least 18 years old and an Australian citizen or permanent resident. Lenders may require applicants to earn a certain amount each year, and have a good credit history.

Credit card providers generally have similar eligibility requirements as personal loans providers, but may have higher income and credit requirements on higher end cards.

  • Both personal loans and credit cards have strict basic requirements for eligibility.
  • Larger personal loans, unsecured personal loans and higher end credit cards generally require excellent credit and have higher income requirements.
  • Non-citizens on specific visa types may be able to get approved for credit cards from certain lenders, whereas getting a personal loan without Australian citizenship or permanent residency may be more difficult.

Repayment

When you sign your loan contract, you agree to repay your personal loan according to a set repayment schedule. While this may vary according to lender, you may make your repayments weekly, fortnightly or monthly throughout the agreed-upon loan term until the loan amount is fully paid off. Repayments include the amount borrowed plus interest.

With a credit card, you must repay at least the minimum amount each month. There is no set repayment schedule. Repaying the full closing balance by the due date allows you to avoid interest charges.

  • With its set repayment schedule, a personal loan tells you exactly how much you have to pay each week, fortnight or month in order to repay your loan within your agreed-upon loan term. This can make it a great option for borrowers who would otherwise find it difficult to pay down their debt without a set schedule.
  • By choosing a personal loan, you know your debt has end date. Once you’ve fully paid off your loan, you will no longer be in debt.
  • With a credit card, you have to be more disciplined in paying down what you owe. If you fall back on only paying the minimum, you could be in a state of revolving debt for years, paying thousands in interest as you go.

Features

When you apply for a personal loan, you can opt for a basic package, or a loan with more features. Basic personal loans tend to come with a lower initial cost, and can work well for borrowers who don’t need extra features. However, choosing a personal loan with certain features can offer more flexibility, while also offering the opportunity to pay off the loan faster and save on interest.

Personal loan features include the ability to make extra repayments, to access those extra repayments via redraw, and to pay out the loan early without penalty.

Credit cards can also be both basic and feature-packed. Basic credit cards generally offer basic features, while focusing on providing access to credit. Premium credit cards provide access to features such as rewards programs, airport lounge access and travel credit. Credit cards can also have introductory offers, sweetening the deal for new customers.

  • Both personal loans and credit cards allow you to go basic for a lower cost, or pay more for features. In this sense, choosing between the loans and cards on offer can allow you to customise your choice to suit your needs.
  • Personal loans don’t often come with introductory offers. But, you will find plenty of credit cards offering intro deals on annual fees, rates, bonus points and balance transfers.

When a Personal Loan Works Better

Having compared personal loans and credit cards, let’s now take a look at the specific situations in which a personal loan may serve you better than a credit card.

You need to borrow a larger amount

Perhaps you’re planning a holiday. Or maybe you’ve got a large renovation project planned at home. You could be getting married, or perhaps you’re investing in a new set of wheels. When it comes to borrowing larger amounts on purchases such as these, a personal loan is usually the better choice.

With a personal loan, you can choose the amount you want to borrow. While the lender will need to be satisfied that you can comfortably afford to repay that amount, you have more control over the amount you borrow with a personal loan than a credit card. Plus, you can choose to secure your personal loan to borrow a bit more.

You want to repay what you owe over a longer period

Whether you’re borrowing $5,000 or $50,000, a personal loan allows you to choose how long you will need to repay what you owe. When you spend on a credit card, you need to repay the entire amount at the end of that billing cycle, or risk paying through the nose in interest. With a personal loan, you can spread the cost – while still paying interest – over a period that suits you.

You want a structured repayment schedule

The fact that credit cards have no set repayment schedule can cause problems for some borrowers. They know they can get away with only paying the minimum, so they let the rest of their balance slide to the following month. They then add more to that balance the following month, and again, get sucked into only paying the minimum.

With a personal loan, on the other hand, you have to stick to a set repayment schedule or risk defaulting on your loan. That means, every month, you pay a certain amount, knocking a bit more off your overall debt to make it smaller and smaller over time.

You want an end date to your debt

Looking again to the issue of only paying the minimum and keeping a revolving debt that never gets paid down, with a credit card there is the potential that you will never get out of debt. With a personal loan, you choose the loan term when you apply, so you know exactly when it will be fully paid off.

You want to consolidate your debt

If you have a number of debts, a personal loan could help you simplify your financial situation by rolling all of those debts into one. In doing this, you will only have one repayment to think about, and one debt to manage. While cutting down on the stress associated with dealing with multiple debts, this option could also help you spread your debt to create a more manageable repayment schedule, or take advantage of lower interest costs.

Opting for a balance transfer credit card can also allow you to consolidate debt, but this option does come with certain drawbacks. Without a set repayment schedule, you may not have the discipline to pay down your transferred balance within the introductory period. Your balance would then revert to a much higher rate of interest. Intro periods also tend to be shorter than personal loan terms, and the amount you can transfer may be lower.

You want lower interest costs

While there are low rate options, credit cards tend to have much higher rates than personal loans. The average credit card interest rate is 18% p.a., but some can push 23% p.a. Personal loans generally offer lower rates – depending on factors such as your creditworthiness – ranging from 5% p.a. to 11% p.a.

Let’s check out an example of how that could affect you.

Zoe owes $15,000 on her credit card with a standard rate of 20% p.a. She pays off $450 each month to clear her debt in four years. Over that time, she pays $6,525 in interest.

Dan has a personal loan of $15,000, which he is repaying over four years. His monthly repayment is $380. Over the entire loan term, he pays $3,261 in interest.

Borrowing the same amount and repaying it over the same period, Zoe pays $70 more per month, to pay $3,264 more in interest. That’s double the amount of interest Dan pays.

When a Credit Card Works Better

What about a credit card? When would a credit card offer a better option than a personal loan?

You want more flexibility

A credit card is designed to be flexible. You apply for a credit card, you are assigned a credit limit, and you can pretty much do what you want with it from there on out. As long as you pay at least the minimum repayment each month and keep within your credit limit, you can use the card as you like, to pay for stuff in person and online, wherever you happen to be in the world.

You want access to a revolving line of credit

With a personal loan, you have access to a lump sum. Once you’ve spent that sum and started paying it back, there is no way you can spend that money again. With a credit card, you have access to a revolving line of credit. You can spend up to your limit, pay it back, and then spend again, repeating the process as often as is required.

You want extras and rewards

While they may come at a higher cost, credit cards can offer all kinds of perks. You could earn rewards on your credit card spending, or take advantage of extras that provide value to you. As long as the value you receive is more than the amount you pay out on the card, you can come out on top.

You want to take advantage of an intro offer

Credit card providers often entice new cardholders with introductory offers. Used correctly, these could provide you access to bonus rewards points, reduced annual fees, or lowered interest costs on purchases or balance transfers. While some personal loans provide intro offers that waive certain fees or reduce rates, these offers are few and far between.

Want to know more about how a personal loan could benefit you? Give us a shout. That’s what our team is here for.

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