Personal Loans vs. Credit Cards

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The next time you need money, you will probably think about getting a personal loan or a credit card. Naturally, the main question revolves around which of the two is cheaper.

Comparing Costs - Interest rate, application fees and annual fees

A comparison of the interest rates charged across personal loans against credit cards would make personal loans come out tops. This is because personal loans charge an average variable interest rate of almost 3% less than their credit card rivals. However, interest rate alone is only part of the story because personal loans also charge an application fee.

These application fees might cost you around $100 for a personal loan while a credit card seldom charges an application fee. Also, check the cost of the ongoing annual fee, as this could be expensive in both cases of personal loans and credit cards.

The Less Obvious

You might also sway towards a credit card that offers you an interest-free 6 months introductory period. However, you should really weigh the potential interest costs of these highly tempting offers because you may potentially end up paying a very high interest rate after the introductory period expires. So, the two things that you really should consider when looking at that attractive credit card versus a personal loan are:

  1. Borrowing period
    If you end up owing money over a long period of time, you might end up paying a much higher interest rate on your credit card than a personal loan that offers you a competitive interest rate over the life of the loan. This is because after the interest-free period ends, many credit cards revert back to charging very high interest rates.
  2. Spending habit
    If you know that you have little difficulty in controlling your spending habits and have always paid your debts on time, then getting a credit card may be a good option. Many personal loans, too, charge a penalty if you repay early. However, if you are prone to overspending and not paying the debts on time, a credit card with its high interest may not be ideal. Perhaps you would benefit from the discipline of regular payments on a personal loan.

Big Purchases vs. Small Purchases

Credit cards have the advantage of acting as 'revolving credit'. What this means is that you are given a spending limit of say $1000 and you are free to spend up to this amount as long as you pay the debt back plus some interest. So a credit card can be useful for paying off small purchases when you don't have the cash on hand.

The opposite is true for personal loans because they are generally suited to larger purchases like a car. So a personal loan acts like a line of credit that is paid back over a fixed period of time.

The decision to choose between a personal loan and a credit card really boils down to choosing a product with the lowest combination of interest rates and fees, while taking a good look at your spending needs and repaying behaviour before deciding on the product that best fits you.

The table below shows the cheapest credit cards and personal loans with variable interest rate:

Cheapest Credit Cards with no application fees

CompanyProductRateAnnual Fee
mecuLow Rate Visa CreditCard8.49%$59
BankSAVertigo Credit Card8.99%$45
Newcastle PermanentValue + Credit Card8.99%$38
St George BankVertigo Credit Card8.99%$45
BankWestLite Gold MasterCard9.49%$89

Cheapest Personal Loans with no annual fees

CompanyProductRateApplication Fee
mecugoGreen HomeImprovement Loan7.99%$0
Industries Mutual CUPersonal Loan8.00%$50
Sutherland Credit UnionRediAccess Overdraft8.25%$50
Home Building SocietyGreenChoice New EnviroFr8.49%$165
RTA Staff CULine of Credit8.55%$75
Source: CANSTAR CANNEX 1/07/2007

How do I compare personal loans and credit cards?

RateCity is the best website to shop around on for over 400 personal loans, over 250 credit cards and most other financial products. At RateCity, you can use expert comparative data from CANSTAR CANNEX, Australia's leading financial research and ratings firm. CANSTAR CANNEX has analysed and evaluated hundreds of products to award five stars to only the very best. The CANSTAR CANNEX star ratings go much further than just looking at interest rates. They also take into account important loan features so you can be confident you are getting the best product.

Use our easy search tools to compare personal loans at RateCity.