Credit card or a personal loan? The answer depends on what you’re buying and how you intend to pay it back.
With Aussies currently in debt equal to about 150% of their household income, it’s no surprise that people are exploring different ways of paying it back. It usually comes down to two options; credit cards and personal loans. Both have pros, cons, penalties and fees, but choosing the way that best suits your financial situation could potentially save you thousands in interest repayments.
The main points of difference
Personal loans and credit cards are both types of credit provided by financial institutions. They can be for similar amounts, but personal loans are for a finite amount of time, whereas credit cards are a revolving line of credit. Personal loans are usually available for terms of between one and seven years and you receive the entire loan amount at the beginning of the term. You then make ongoing payments to repay the loan in full.
Credit cards do not come with terms. You are offered a credit limit and required to make ongoing repayments to keep your account in good standing. You can continually draw up to and including that limit and spend however much you choose on your card. You need to repay a percentage of whatever you spend each month.
Structurally, credit cards and personal loans are similar. They are both forms of credit and they both require a monthly repayment. What differs are the features and fees. Credit cards offer interest-free days, balance transfers and rewards but personal loans are more suitable for debt consolidation and have a maximum loan term so the debt is always repaid. While annual fees are popular with credit cards, personal loans favour application and monthly services fees.
Comparison of personal loans and credit cards
Compare a range of personal loans
What to consider with a personal loan
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Credit card points of consideration
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Personal loans vs. credit cards: What's the right product for you?
There is no single answer to this question. While a credit card might be the right choice in one situation, a personal loan might be more suitable in another, and in a third situation, neither might be appropriate. Here's how to decide what credit product will best meet your needs:
- What are you applying for the funds for? If you need money for an immediate, one-off expense, such as a large purchase, then a personal loan may be suitable. If you want continued access to credit, then a credit card may be more suitable. However, keep in mind that there are flexible personal loan and credit card products. For example, you can top-up some personal loans with additional funds, and you can also use credit cards to pay for one-off purchases, but as the loan term is ongoing you may be tempted to keep the repayments rolling over instead of paying it back in full.
- How do you manage your repayments? As mentioned in the point above, credit cards are an ongoing form of credit, while personal loans have an end-date. If either a personal loan or credit card will work for your needs, you may want to consider how disciplined you are with repayments. If you think you may be tempted with the credit line sitting there, then a more structured repayment schedule, such as that offered by a personal loan, may be worth considering.
- Are you consolidating debt? It's important to consider your options carefully. How much debt do you have and does it include loans and credit card accounts? Make sure you will be able to bring across all your accounts to consolidate – for instance, only certain providers allow you to balance transfer loans to a credit card. You also have the option of consolidating your credit card to a personal loan, which can help you save.
- How much are you looking to borrow? Credit card limits differ, as do personal loan limits. Generally, for an unsecured personal loan you cannot apply for more than $55,000. Secured personal loans are different but you will not be able to be approved for more than the asset you are using as security. You may be able to access a higher credit limit with a credit card but you will generally need to meet stricter eligibility criteria.
Things to consider when deciding between personal loans and credit cards
- Interest and comparison rates. If you compare interest rates, generally personal loans are cheaper. The true cost is reflected in the comparison rate as you need to consider any application or service fees. Since credit cards never display the comparison rate, it’s important to remember that you take into account the annual fee of the credit card.
- Fees. Personal loans usually have an application and service fee, whereas credit cards usually just have the annual fee, though you can find one without one.
- Your financial situation. If you have good control over your spending and you regularly follow your budget then a credit card could be suitable. Personal loans also can charge you early repayment fees, you will need to confirm whether this is the case with your lender. On the other hand, if you are slow at repaying debts, dragging it over the introductory period could incur high interest.
Matthew knows his financial situation
Matthew is looking to buy his first car and has found a 2000 model Mitsubishi Lancer selling at $5,000 at his local dealership. As this is not a private sale, he has a few different payment options. He wants to know if it's cheaper to pay for the car on his credit card and make extra repayments or apply for a personal loan with the same provider. As you can see from the table below, in the end it’s probably cheaper for him to purchase the car on his credit card, saving him up to $403.
| Feature | Personal loan | Credit card |
| Loan amount | $5,000 | $5,000 |
| Loan term | 2.5 years | 2.5 years |
| Interest rate | 14.09% p.a. | 12.99% p.a. |
| Application fee | $150 | $0 |
| Annual fee | $0 | $58 |
| Monthly fees | $10 | $0 |
| Monthly repayments | $200 | $200 |
| Interest repaid | $961 | $862.11 |
| Interest plus fees | $1411 | $1007.11 |
Rates and figures correct as of 16/08/2013
Regardless of which you choose, you need to be disciplined in the way you use your credit card or personal loan and make regular repayments. With a credit card, always aim to pay back more than the minimum repayment to save on interest and if you have a personal loan, try to make extra repayments if you’re not penalised for it.
Hi
I’m looking to consolidate some debt about $27k on 2 credit cards. Last year I had a difficult year of being out of work for a considerable period.
One credit card with my main bank had a balance then of $10k from a previous credit card balance transfer I had to put into financial hardship for a while, so my main bank are unlikely to support me in getting a personal loan to restructure my debt.
Personal loan or another credit card balance transfer?
Will other credit card providers baulk at accepting a credit card application now given the financial hardship I went thru last year?
Earning good money again now.
Hi Chris,
Thanks for your question.
The first step might be ordering a free copy of your credit file to see what kind of state your credit is in. Once you know this you can get a better idea of the loans or credit cards you can apply for. You can take a look at our debt consolidation guide on this page to see the options you have available to you – keep in mind that this is a large debt you are trying to consolidate, so having a chat to the banks/lenders before you apply might be a good idea.
You can also give the free financial counselling service a call on 1800 007 007 as they can provide you with some free personal advice – as we’re a financial comparison service we can only provide general information, so they may be able to steer you in a certain direction.
I hope this information will be of use.
Thanks,
Elizabeth
I am looking to buy a few things for around $10,000 and am trying to decide wether it will be cheaper for me to get a personal loan or a credit card.
The loan is about 14% p.a and the card is about 11% p.a on purchases. I can afford $200 a month and more on good months (work hours fluctuate).
Hi Jarryd,
Thanks for your question.
Unfortunately we don’t recommend specific products, services or providers. I’d recommend that you use our personal loan calculator and credit card interest calculator to see which option suits your financial and personal situation.
Cheers,
Shirley
Hi Shirley,
I believe your case study is some what misleading as in order for Matthew to buy the car on the credit card then it has to be from a dealer. If it’s a private sale then this case study is not right as you did not mention the facts about Paying via credit card as to who can receive that payment.
Thanks
Hi Chin,
That’s a great suggestion. We love improving content for our readers, so we’ve updated the case study above.
Thanks,
Elizabeth
Hi
I am trying to find out if although having successfully completing a Part IX Debt Agreement earlier this year (and earlier than agreed) has that stuffed up my credit rating to the extent that credit cards are unobtainable.
Could you please advise me
Hi Nick,
Thanks for your comment.
Unfortunately, this is likely to be the case. The filing of a debt agreement is equivalent to a debtor formally announcing that they are insolvent and unable to meet their financial obligations.
Please see this page for more information.
Hope this helps,
Shirley