Personal Loans vs. Credit Cards

Personal Loans vs. Credit Cards

The choice between a personal loan and credit card when you’re in need of money comes down to a few key factors. The guide below gives you some things to consider before settling on which will best fit your needs.  

Comparing Costs

When beginning to compare credit cards and personal loans there are a number of upfront costs and fees that should be weighed up to find the best value deal. These include application and annual fees that vary from product to product. Whilst most personal loans charge an application fee it is easy to find credit card options that don’t but this doesn’t necessarily mean better value in the long run.

To determine long term value it is important to compare interest rates on both products so that you can calculate how much you will be paying back over a set period of time. Ongoing annual fees should also be compared when deciding on the best value product for your needs. Information on interest rates and ongoing fees can be found by using the RateCity credit card calculator and personal loan calculator.

The Less Obvious

When comparing the two you might be swayed towards a credit card offering an interest-free introductory period, however, it is important to weigh the potential interest costs of these highly tempting offers. Often, after the introductory period expires, you can be left paying hefty fees that weren’t immediately obvious. Instead of being taken in by seemingly amazing introductory deals consider:

Borrowing period: If you end up owing money over a long period of time, you might be stuck 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.
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. But if you are prone to overspending and not paying debts on time, a credit card with high interest rates may not be ideal. You may instead 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 as they are generally suited to larger purchases. Personal loans act like a line of credit that is paid back over a fixed period of time and large amounts can be borrowed depending on your personal circumstances and the lender you choose.

I have chosen the best product for me, now what?

Once you have determined whether you need a personal loan or credit card for your money situation it’s time to start comparing the products on the market to find the best deal. For credit card products use the credit card comparison tool and for personal loans the personal loans calculator will help you narrow down your search for the product that suits your needs. 

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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.

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.

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.

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 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 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.

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.

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 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.

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 apply for a quick loan online?

While some lenders will require you to provide paperwork in person, many lenders will allow you to make an application for quick personal loan online. You’ll still need to provide information on your identity, income, and loan purpose in most cases.

Are there low doc personal loans?

Self-employed borrowers may be eligible for low doc personal loans, which require less documentation in their application process than many other personal loan options.

It’s important to remember that though low doc personal loans may require less paperwork, you may need to provide additional security, or pay a higher interest rate.

Can unemployed single parents get personal loans?

It can be more difficult for unemployed borrowers to successfully apply for a personal loan. Most lenders require borrowers to have a regular income available to cover the cost of loan repayments.

If you’re self-employed, or if less than half of your income comes from Centrelink, you may not be eligible for some personal loan options. Consider contacting the lender before applying.

Can you pay off a quick loan early?

Many lenders will allow you to make extra repayments onto a quick personal loan when you can afford them, or even exit the loan early, which can help reduce the total interest you are charged. Be sure to check your quick loan’s terms and conditions, as some lenders charge early exit fees for paying off a loan ahead of schedule.