Is it better to take out a personal loan or use my credit card?

Is it better to take out a personal loan or use my credit card?

If you have some large expenses, or are interested in making some major purchases, you may need to consider your credit options to get the finance you need. Two popular options for borrowing money are credit cards and personal loans, but working out which one is the better choice can depend greatly on the nature of your expenses, and how you plan to pay them back. 

What’s the difference between a personal loan and a credit card?

A personal loan is structured a lot like a mortgage – you apply to borrow money from a lender, typically in one large lump sum, then repay this amount, plus interest, over a period of time agreed with the lender.

Credit cards offer a less structured, more flexible line of credit, where you can borrow as much or as little of the card’s available credit limit as you need. While credit cards do require minimum repayments, you’re otherwise free to repay your credit card balance at a pace of your choice. Credit cards often come with a number of interest-free days per month, after which you’ll only be charged interest on what you owe, and not the card’s full credit limit.

When is it better to take out a personal loan?

While your ideal credit option will depend on your own personal financial situation, personal loans are often the finance option of choice for borrowers in need of large sums of money up front for specific purposes (e.g. paying for a wedding or starting a business), that they can’t afford to repay all at once, and will instead need to repay gradually over time.

One possible benefit of personal loans is that they are organised in advance. When you apply for a personal loan, you enter into a contract with your lender to repay what you owe over a predetermined length of time, so you should know exactly what you’re in for. This can be especially true if you opt for a personal loan with a fixed interest rate, where you can be confident that you’ll pay the same amount of interest with each repayment, and plan your household budget accordingly.

The structured nature of personal loans can also be a downside to certain borrowers. Because lenders plan personal loans around a specific repayment schedule, borrowers may not have the option available to borrow more money on the loan if they find themselves in need.

Some personal loans have specific credit requirements – for example, some low-interest personal loans are secured loans, and require the value of an asset (e.g. your car, equity in your home) to guarantee the loan. In these cases, you risk losing your security asset if you default on your repayments.

Also, having a personal loan often means making a commitment to repay your debt over the course of 12 months or more. The longer it takes to repay a debt, the lower and more affordable your repayments will be from month to month, but the more interest you may ultimately pay in total. While several personal loans will allow you to make extra repayments to reduce your interest charges and pay off the debt early, you may need to pay early exit fees to make up for the interest payments lost to the lender, which could make the exercise more expensive than it’s worth.

Having a personal loan currently owing in your credit history can also potentially make it more difficult to be approved for additional credit if you find yourself needing it during the term of your personal loan.

Low interest personal loans:

When is it better to use a credit card?

Credit cards are often the finance option of choice for borrowers looking for flexibility. Because you can borrow money from the lender in small or large sums as you need them, a credit card can prove useful for covering small or large expenses and paying for middling to major purchases. If these expenses are small enough that you can afford to repay them in a timely fashion (e.g. within your card’s interest-free period), you may not even need to pay interest on your credit card purchases.

Also, selected credit cards (often Gold and Platinum-tier cards) offer a range of additional benefits, such as the opportunity to earn reward points that can be redeemed for cheaper flights, shopping, and other bonuses.

Similarly to personal loans, the flexibility offered by credit cards can also prove to be a downside to certain borrowers. Because the minimum repayments required by many credit cards are often very low (e.g. around 2% of the balance owing), the temptation is there to spend up big on your credit card and just pay back what you’ve borrowed in the smallest possible repayments.

One issue with this strategy is that while credit cards offer a set number of interest free days (often 45 or 55 days from the start of each payment cycle, often monthly), if you don’t pay off your balance by the time these days expire, you could end up being charged interest on what you owe, potentially causing your debt to grow at a faster rate than you can afford to repay it.

It’s also important to note that credit cards with more features, benefits and rewards (often Gold and Platinum-tier cards) are more likely to charge higher interest rates and fees as a result. This could mean that you end up paying more in fees and charges than the value you ultimately redeem in rewards and benefits.  

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Learn more about personal loans

How much can you borrow with a bad credit personal loan?

Borrowers who take out bad credit personal loans don’t just pay higher interest rates than on regular personal loans, they also get loaned less money. Each lender has its own policies and loan limits, but you’ll find it hard to get approved for a bad credit personal loan above $50,000.

What are the pros and cons of bad credit personal loans?

In some instances, bad credit personal loans can help people with bad credit history to consolidate their debts, which can help make it easier for them to clear those debts. This is because the borrower might be able to consolidate several debts with higher interest rates (such as credit card loans) into one single debt with a lower interest rate and potentially fewer fees.

However, this strategy can backfire if the borrower spends the loaned funds instead of using it to repay the new loan. Another disadvantage of bad credit personal loans is that they have higher interest rates than regular personal loans.

Are there emergency loans with no credit checks?

While many personal loans require a credit check as part of the application process, some personal loans and payday loans have no credit checks, which may appeal to some borrowers with a bad credit score.

Keep in mind that even if a loan is available with no credit check, the lender will likely want to confirm that you can afford the repayments on your current income.

What are the pros and cons of personal loans?

The advantages of personal loans are that they’re easier to obtain than mortgages and usually have lower interest rates than credit cards.

One disadvantage with personal loans is that you have to go through a formal application process, unlike when you borrow money on your credit card. Another disadvantage is that you’ll be charged a higher interest rate than if you borrowed the money as part of a mortgage.

What is a bad credit personal loan?

A bad credit personal loan is a personal loan designed for somebody with a bad credit history. This type of personal loan has higher interest rates than regular personal loans as well as higher fees.

Are there alternatives to $2000 loans?

If you need to borrow $2000 or less, alternatives to getting a personal loan or payday loan include using a credit card or the redraw facility of your home, car or personal loan.

Before you borrow $2000 on a credit card, remember that interest will continue being charged on what you owe until you clear your credit card balance. To minimise your interest, consider prioritising paying off your credit card.

Before you draw down $2000 in extra repayments from your home, car or personal loan using a redraw facility, note that fees and charges may apply, and drawing money from your loan may mean your loan will take longer to repay, costing you more in total interest.

Do $4000 loans have no credit checks?

Many medium amount loans for $4000 have no credit checks and are instead assessed based on your current ability to repay the loan, rather than by looking at your credit history. While these loans can appear attractive to bad credit borrowers, it’s important to remember that they often have high fees and can be costlier than other options.

Personal loans for $4000 are more likely to have longer loan terms and will require a credit check as part of the application process. Bad credit borrowers may see their $4000 loan applications declined or have to pay higher interest rates than good credit borrowers.

Can you refinance a $5000 personal loan?

Much like home loans, many personal loans can be refinanced. This is where you replace your current personal loan with another personal loan, often from another lender and at a lower interest rate. Switching personal loans may let you enjoy more affordable repayments, or useful features and benefits.

If you have a $5000 personal loan as well as other debts, you may be able to use a debt consolidations personal loan to combine these debts into one, potentially saving you money and simplifying your repayments.

Can I get a no credit check personal loan?

Personal loans with no credit checks are available and called ‘payday loans’. These are sometimes used as short-term solutions for cash-strapped Australians. They often carry higher interest rates and fees than regular personal loans, and individuals risk putting themselves into a worsened cycle of debt.

Does refinancing a personal loan hurt your credit score?

Personal loan refinancing means taking out a new loan with more desirable terms in order to access a more competitive interest rate, longer loan term, better features, or even to consolidate debts.

In some situations, refinancing a personal loan can improve your credit score, while in others, it may have a negative impact. If you refinance multiple loans by consolidating these into one loan, it could improve your credit score as you’ll have only one outstanding debt liability. Your credit may also improve if you consistently pay the instalments on time.

However, applying to refinance with multiple lenders could negatively affect your credit if your applications are rejected. Also, if you delay or default the repayment, your credit score reduces.

What do credit scores have to do with personal loan interest rates?

There is a strong link between credit scores and personal loan interest rates because many lenders use credit scores to help decide what interest rates to offer to potential borrowers.

If you have a higher credit score, lenders will probably classify you as a lower-risk borrower. That means they’ll be keen to win your business, so they may offer you a lower interest rate if you apply for a personal loan.

If you have a lower credit score, lenders will probably classify you as a higher-risk borrower. That means they might be concerned about you defaulting on the loan and costing them money. As a result, they might protect themselves by charging you a higher interest rate.

Can students with no credit history get loans?

It is possible for students with no available history of borrowing or managing money to get a personal loan, though it may be more difficult as well as expensive than for borrowers with a good credit history.

Having no credit history means having no credit score. While many lenders may consider having no credit score to be better than having a bad credit score, they may still consider it riskier to lend to an unknown borrower and may charge higher interest rates or fees than to borrowers with good credit scores.

Do student personal loans require security?

While some personal loans can be secured by the value of an asset, such as a car or equity in a property, student personal loans are often unsecured, which typically have higher interest rates.

Some lenders also offer guarantor personal loans to students. These loans have lower interest rates, as a guarantor (usually a relative of the borrower with good credit) will fully or partially guarantee the loan, taking on the financial responsibility if the borrower defaults.

Can I get guaranteed approval for a bad credit personal loan?

Few, if any, lenders would be willing to give guaranteed approval for a bad credit personal loan. Borrowers with bad credit histories can have more complicated financial circumstances than other borrowers, so lenders will want time to study your application. 

It’s all about risk. When someone applies for a personal loan, the lender evaluates how likely that borrower would be to repay the money. Lenders are more willing to give personal loans to borrowers with good credit than bad credit because there’s a higher likelihood that the personal loan will be repaid. 

So a borrower with good credit is more likely to have a loan approved and to be approved faster, while a borrower with bad credit is less likely to have a loan approved and, if they are approved, may be approved slower.