Personal loan or put it on the plastic?

Personal loan or put it on the plastic?

In the credit card versus personal loan debate, it’s important to weigh up costs and benefits.

Used wisely, credit cards do have some advantages. They offer an interest-free period (usually around 55 days); can provide a financial lifeline in emergencies; and cards make it possible to grab ‘on the spot’ bargains.

Nonetheless, RateCity chief executive Alex Parsons cautions, “The key to making the most of credit cards lies in setting, and sticking to, personal spending limits and paying off the card in full each month to avoid interest charges. If you’re unlikely to manage this, a personal loan might be a better option particularly for big ticket buys.”

Like cards, personal loans have definite upsides.  The time and paperwork involved in applying for a loan makes impulse buys less likely, and while you won’t get the benefit of interest-free days, the rates can be lower than for credit cards.

As a guide, the RateCity database shows card rates range from under 12 percent through to 20.99 percent at the upper end of the scale. Personal loan rates are available below 9 percent. The combination of a cheaper rate, fixed repayments and a set term can make personal loans a better value option for high value purchases.

Cards streak ahead

Despite the pluses of loans, credit cards take pole position for popularity.

John Arnott, executive director at ING DIRECT said, “Our latest Household Financial Wellbeing Index shows that only one in five households have a personal loan at present, down from 20 percent in early 2010. By contrast only 15 percent of households don’t have a credit card – so cards certainly have the weight of numbers.”

The intriguing aspect is that Australians appear to be weaning themselves off both types of debt.

Arnott added, “Our research found 17 percent of households say their favourite way to spend money is paying off debt.”

The Reserve Bank of Australia (RBA) confirmed this trend in its March 2013 Financial Stability Review, saying, “Many households have been taking advantage of the lower interest-rate environment to repay existing debt more quickly than required”.

Our preference for paying down debt has had a significant impact on national card debt, which has fallen from $50.6 billion in June 2012 to $49.8 billion in mid-2013. Most importantly, card debt attracting interest charges has also dropped, dipping from $36.6 billion 12 months ago to $34.9 billion in mid-2013.

Choice matters

The bottom line is that both personal loans and credit cards have their place in a financial toolkit. Alex Parsons sums it up, “The important thing is to assess the product best suited to your needs, and seek out a low rate and good value with the help of comparison websites such as Ratecity.com.au.”
   

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Learn more about personal loans

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.

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 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.

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.

What is a personal loan?

A personal loan sits somewhere between a home loan and a credit card loan. Unlike with a credit card, you need to sign a formal contract to access a personal loan. However, the process is easier and faster than taking out a mortgage.

Loan sizes typically range from several hundred dollars to tens of thousands of dollars, while loan terms usually run from one to five years. Personal loans are generally used to consolidate debts, pay emergency bills or fund one-off expenses like holidays.

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.

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.

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.

Should I get a fixed or variable personal loan?

Fixed personal loans keep your interest rate the same for the full loan term, while interest rates on variable personal loans may be raised or lowered during your loan term.

A fixed rate personal loan keeps your repayments consistent, which can help keep your budgeting consistent. You won't have to worry about higher repayments if your rates were to rise. However, on a fixed loan you’ll also potentially miss out on more affordable repayments if variable rates were to fall.

What is the average interest rate on personal loans for single parents?

Like other types of personal loans, the average interest rate for personal loans for single parents changes regularly, as lenders add, remove, and vary their loan offers. The interest rate you’ll receive may depend on a range of different factors, including your loan amount, loan term, security, income, and credit score.

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.

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 repay a $3000 personal loan early?

If you receive a financial windfall (e.g. tax refund, inheritance, bonus), using some of this money to make extra repayments onto your personal loan or medium amount loan could help reduce the total interest you’re charged on your loan, or help clear your debt ahead of schedule.

Check your loan’s terms and conditions before paying extra onto your loan, as some lenders charge fees for making extra repayments, or early exit fees for clearing your debt ahead of the agreed term.

Can I get a fast loan with bad credit?

Some lenders offer fast loans to borrowers with bad credit. Providers of small payday loans of up to $2000 or medium amount loans of up to $5000 may have no credit checks, though these lenders will usually want to confirm you can afford its loans on your income.