When it’s time to make a big purchase that you can’t, or don’t want to, pay for upfront, you’ll likely consider two of the most common finance options: personal loans or credit cards. While the two options have a lot in common, their differences are very important in your decision. Before deciding whether to use a personal loan or a credit card, there can be lots of things you need to consider, such as what you’re paying for, how long you’ll need to repay the amount and how much you intend to pay towards the purchase each month.
Firstly, a personal loan is a set loan amount. This means you can decide before applying how much you’ll need for your big ideas and what repayment amount you can comfortably fit into your budget. If you require a substantial amount of money, a personal loan can help you break that expense down into manageable repayments.
A credit card allows you to spend up to the credit limit and you can spend more or less each month as you need. Your limit is set when you first set up your credit card, but your card provider can change this amount upon request.
If you use your credit card, you'll need to make a monthly credit card repayment. It’s recommended that you pay off the entirety of your bill each month to avoid hefty interest charges. In short, don’t spend more than you can afford to repay at the end of each month.
Another thing you can consider is what you plan to use your credit card for. Have you got a home renovation planned, and contractors and quotes lined up? A personal loan could be the way to go.
Depending on the credit card, it can generally be better for smaller, day-to-day purchases that can be repaid each month.
A personal loan comes with either a fixed or variable interest rate and is charged on the total amount borrowed. The interest rate is usually personalised and based on a few factors, including and primarily your credit history. This also depends on the lender.
A credit card works a little differently to a personal loan in this regard. Most credit cards generally give you an interest-free period, which means if you repay your whole bill by the end of that period, you won't be charged any interest.
However, if you only make the minimum repayment, on the balance remaining. Interest charged on credit cards can be higher than personal loan rates.
Most personal loans include fees of some sort. The specific types and amounts will depend on each lender, but you can expect to pay one or more of the following:
- Establishment fee
- Monthly fees
- Late or missed repayment fees
- Early exit fees
These can be built into your regular repayments and are paid off over time.
A credit card also has some fees attached to it, such as a set-up fee and an annual fee. If you’re thinking you might be using some cash in the near future, be aware that credit cards usually have cash withdrawal fees. Like a personal loan, you’ll also incur a missed or late payment fee if you fail to make the minimum monthly repayment.
A fixed-rate personal loan can make budgeting nice and easy. With repayments of the same amount each week, fortnight or month it can be an easy way to keep on top of your finances.
A variable-rate loan generally results in different repayment amounts throughout the loan, or it might mean the regular repayments are the same and it’s only your final repayment amount that varies. Each lender operates differently, so make sure you check the fine print before signing up.
The amount you repay for your credit card dependent on how much you spend. You don’t have to pay the full amount back at the end of each month, but depending on your financial circumstances, it can be good practice to pay off the balance each month. This can save you interest over time.
Both personal loans and credit cards can be repaid via direct debit among other methods.
Personal loans may not have any conventional rewards or discounts, but they generally have a stable repayment amount, especially if it's a fixed rate personal loan. And if you do your research and choose your lender wisely, you can often pay off your loan before the end of the loan term, cut down on interest charges and not incur any fees for your hard work.
Many credit cards will offer a range of discounts, rewards systems and perks. Some have a rewards scheme whereby points can be accrued for every dollar spent. While this can sound very enticing, rewards schemes can encourage spending, sometimes beyond your means. It’s best to consider rewards as a nice bonus and try your best not to get too caught up in them.