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.
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.