We get asked often; ‘What is better, a personal loan or paying by credit card?’
There is no simple answer for this as it depends on what you are purchasing, your financial situation and spending habits among other things. Both are forms of credit in the form of Credit Cards and Personal Loans provided by financial institutions but each can have their own advantage. Both will have fees, charges, advantages, disadvantages, and limitations. The biggest major point of difference is personal loans have a set term whereas credit cards are an ongoing line of credit that remains available to re-draw up-to and including the limit. Both forms of credit require a form of ongoing monthly payment. Below we outline the pros and cons of both options.
Credit Cards
Credit cards offer the benefit of instant spending ability and help with cash-flow. They often times have rewards programs where points accumulate based on spending and don’t have a set term.
With a credit card, you are set to a credit limit (that may be increased or decreased depending on the provider’s requirements) and you will repay a percentage of your spending each month.
A downside to credit cards is that they usually have higher interest rates and as they only require a minimum payment, they can take a longer period of time for paying off. They are best used for smaller purchases that can be paid off in a short period of time. such purchases would include electronics, white goods or general shopping.
Personal Loans
Personal loans may offer lower interest rates than the credit card alternative and they have terms with a start and end date. The application process may be a little more comprehensive but may be suitable for larger purchases such as a holiday, engagement ring or wedding, debt consolidation or even home renovations.
Ultimately the better option would depend on the scenario. Sometimes neither option is the cheapest and alternatives need to be considered such as a secured car loan if the purchase was for a vehicle.
Making a choice between Credit Card and Personal Loan
Things to consider would be:
- The true cost of the loan including interest rate and all fees and charges which would be reflected in the comparison rate?
- What will you be using the funds for and is there a chance the amount can increase?
- How do you intend to pay it off and will the repayment have an impact on your day to day spending?
- Are there any early repayment fees, application fees, annual or monthly account keeping fees?
- If consolidating debt, will the new loan put you in a better or worse position?
When a Personal Loan Usually Makes More Sense
A personal loan suits a known, one-off cost with a clear finish line. Because the amount, the term and the repayment are fixed at the start, you know the date the debt ends, and that structure does most of the work for you. Consolidating several smaller debts, covering a wedding, funding a renovation or replacing a car are all situations where a defined term stops the balance drifting.
The discipline is the point. A fixed repayment leaves no room to pay only a minimum and carry the balance forward, which is how revolving debt quietly outlives the purchase that created it. If you have previously cleared a card balance only to watch it climb again, a personal loan removes that option by design.
Structure matters too. A secured personal loan, where an asset such as a vehicle sits behind the debt, is generally assessed differently to an unsecured one. If you are weighing up a purchase like this, our guide to car finance covers how security changes the assessment.
When a Credit Card Is the Better Tool
A card earns its place with short-term, flexible spending you intend to clear inside the statement period. Paid in full each month it can cost you nothing in interest while still giving you purchase protection, and the ability to draw only what you need is genuinely useful for irregular or unpredictable expenses.
The trouble starts when the balance survives past the interest-free window. Revolving credit has no scheduled end, so the balance is only ever as small as your last repayment made it, and minimum repayments are set low enough that a modest balance can take years to clear.
A practical test: if you can name the date you will have paid it off, a card is fine. If you cannot, a fixed-term product is usually the safer structure. MoneySmart, the regulator’s consumer guidance service, publishes independent comparisons of both, and running the numbers through our loan calculators will show you the difference against your own budget before you commit.
Looking for a Personal Loan?
If you are looking at a Personal Loan or have questions about applying for a Personal Loan, Contact our Specialist Lending team. We will have a response to you within 24 hours.
Disclaimer – SB Finance (aust) Pty Ltd (trading as SB Finance ABN: 72 620 392 038) provides factual information, general advice and services on financial products as a Licensed credit representative (499191) of Larrijade Pty Ltd t/as Drive Finance Australian credit license 393048.We can also provide you with general advice and factual information on a range of other products, services and providers. We hope that the information and general advice we can provide will help you make a more informed decision. We are not owned by any Bank or Insurer and we are not a product issuer or a credit provider. Although we cover a wide range of products, providers and services we don’t cover every product, provider or service available in the market so there may be other options available to you. We also don’t recommend specific products, services or providers. If you decide to apply for a product or service through our website you will be dealing directly with the provider of that product or service and not with us. We endeavour to ensure that the information on this site is current and accurate but you should confirm any information with the product or service provider and read the information they can provide. If you are unsure you should get independent advice before you apply for any product or commit to any plan. © SB Finance.
