You need access to funds. Perhaps you’re looking to pay down debt, purchase a new car or take a holiday. So what are your options? More than likely you are looking at personal loans vs credit cards. Knowing which one to choose will come down to several factors.
When To Use A Credit Card
Credit cards can be marvellous things, a tiny piece of plastic that gives you access to a huge amount of spend. They do however have their limitations. Unlike a charge card, they have a finite limit to what you can spend, there can also be limitations to what you purchase with them.
Additionally, they have high-interest rates and strict repayment terms each month, meaning they are best suited for small purchases that you can pay off quickly.
When To Undertake A Personal Loan
Conversely, personal loans are better suited to large purchases that you require more time to pay off. Personal loans give you much more competitive interest than that offered by credit cards as well as an extended loan term.
Most personal loans will have terms between one and five years in length. Allowing you to spread the cost out and make more manageable payments.
Personal Loans Vs Credit Cards
So how do personal loans vs credit cards differ?
Credit Cards
- Revolving line of credit that can be repaid and utilised again and again for an indefinite period of time.
- Strict repayment conditions month on month.
- Higher interest rates than personal loans.
- Zero-interest if repaid within the set period.
- No security needed.
- Once you hold the card, you can spend the balance on whatever you like.
- You can apply for credit increases as needed, offering great flexibility.
Personal Loans
- Lump-sum payment for use in a finite term.
- Flexible terms negotiated at time of loan application.
- Lower interest rates than credit cards.
- Interest applies for the term of the loan.
- Competitive borrowing option for those with a good credit score.
- Usually requires some kind of collateral or security against the loan.
- The application will require a stated reason for the loan.
Personal Loans Vs Credit Cards – Which One Is For You?
So how to choose between personal loans vs credit cards? There is a number of factors to consider:
1. How much do you need?
If it’s a significant amount, a personal loan will offer you a lower interest rate. Keep in mind that even with a secured personal loan, you will not be able to borrow more than the value of the item used as security. Unsecured the maximum a personal loan can provide is around 55,000. A credit card can potentially offer you more but will have strict qualifying criteria. When looking at getting a credit card it is important to shop around for the best rates first. Companies such as ‘Rate City‘ are good for this.
2. What will you be using the funds for?
If it’s funding for a one-off purchase such as a car, a personal loan may be more suitable. If you need access to ongoing funds in various amounts, a credit card may work better. The downside of that being that the rolling terms may discourage you from fully repaying the debt.
3. Are you consolidating a debt?
Not all lenders will permit you to roll debts or consolidate them on their products. So you are best to speak with an expert in debt consolidation in these instances to ensure you get the best offer. Having said that, choosing between a personal loan vs credit card, a personal loan can be a great option for consolidating and clearing multiple debts.
4. What are your repayment habits like?
If your track record of managing debt isn’t the best, a personal loan may be the better option. The last thing you want is to not be able to make large monthly repayments on a credit card that then accrues high interest.
The temptation to overspend on credit may also be too much. A personal loan gives you a lump sum agreed upon at the time of application – no risk of overspending.
Choose Carefully And Keep Your Credit Score Healthy
The personal loans vs credit cards debate is a great one, but ultimately, no matter what you choose, you can still get into financial distress if you do not repay the loan responsibly. Both options represent risk and rely on the borrower to act with discipline. Both have consequences if left unpaid. Both can damage your credit score if not paid down under the original terms and conditions.
With a poor credit history, you’re also less likely to be offered competitive rates and loan terms. Even a few missed payments can create damage to your financial history. Past issues could inhibit you from gaining approval for a personal loan or credit card. If you have a poor credit history and need help to get back on track, our team can help. At Clean Credit, we work hard to clean your credit history and take charge of your financial situation. Call us today on 1300 015 210.