Personal Loans Vs Credit Cards
Deciding between a personal loan and a credit card can be difficult. It’s important to make the right decision, but where do you start? We’ve put together some tips to make it easy to compare the two options and choose the best one for you.
• Lower interest rate: Personal loans will typically have a lower interest rate than credit cards. If the borrower has collateral available, like a car, a secured personal loan could be an option where the rates will be lower. There are some exceptions with most credit cards offering a very low balance transfer rate (some as low as 0%) for a certain period, usually 6–12 months.
• Choice of fixed or variable rate: Personal loans provide a choice of fixed or variable rate. With a fixed rate you are locking in your repayments for the period the loan is fixed, which for personal loans is generally the life of the loan. Credit cards are variable only, meaning the rate can change with market conditions.
• Structured repayment schedule: Personal loans are repaid over a set length of time (eg. 5 years). This means the borrower knows exactly what their repayments will be based on the current interest rate and when the debt will be paid off.
• No temptation: A personal loan removes the temptation of habitual spending. Credit cards enable you to easily redraw your repayments, which can cause you to become stuck in a ‘credit card rut’ if your spending is not managed. Some personal loans will have a redraw facility that allows the borrower to redraw from their additional payments not affecting their principal payments made with the loan still paid off within the required time.
• Debt consolidation: Personal loans are an ideal avenue to consolidate multiple debts (including credit cards) into a low rate loan, with one simple payment.
• Balance transfers and introductory offers: Most credit cards usually offer an introductory or balance transfer rate, in some instances as low as 0%. The catch is it will only last for a short period of time – usually between 6–12 months, after which they convert to the standard, higher rate and generally only apply to the balance transferred with all new purchases made with the card incurring interest immediately. Many card issuers are also now charging a fixed fee for handling the balance transfer. Balance transfers and introductory offers are great if the debt will be repaid within the applicable time frame but are not suited for longer term debt.
• Interest free period: Credit cards will generally have an interest free period whereby interest is not charged until after a certain amount of time.
• Ongoing credit facility: A credit card is an ongoing facility; you can continually access the funds you have repaid (up to the applicable limit). Once a personal loan has been repaid, to access more credit you need to reapply.
• Credit cards will generally have an ongoing annual fee. Personal loans generally have a one-off application/establishment fee, which may be waived if certain criteria are met.
• Reward/loyalty programs: Often credit cards have a reward or loyalty program or ‘chance to win’ associated with them. Most loyalty schemes work by giving you points for dollars you have spent which can then be redeemed. Usually there is a minimum number of points that needs to be acquired and often the accrued points expire after a certain period if they are not redeemed. It’s important to remember that with each spend on your credit card, you are still incurring debt.
If you are still unsure which would benefit your situation, please chat to your financial institution, or to read more about the variety of personal loans and credit cards we offer, please visit our website.
^ Paul – Lending Services Manager