When should I consider a personal loan over a credit card?

When should I consider a personal loan over a credit card?

Personal loans and credit cards are two popular financing options for those looking to access credit, particularly when making major purchases.

Choosing between a personal loan and a credit card can be a tough financial decision. It’s worth weighing up the pros and cons of both options before you make any big purchases or consider paying off outstanding debt.

Let’s explore when it may be appropriate to consider a personal loan over a credit card

  • For one-off big expenses

Whether you’re planning a holiday, a wedding or home renovations, sometimes those big-ticket items are better served by taking out a personal loan. A lump sum loan payment may be a better financial fit for those who don’t want to take out a new credit card – and be tempted to keep using it – for one specific purpose.

This is because personal loans generally carry lower interest rates than credit cards on average. RateCity research shows that the average secured personal loan rate is 9.43 per cent, whereas the average credit card rate is 16.97 at the time of writing this. If you’re seeking finance for a one-off big expense, this may be one way to keep interest repayments down.

Keep in mind that there are low-rate credit cards and interest-free credit cards available. And if you’re the type of cardholder who always pays their credit card balance in full each statement period, then a credit card may be a better solution for you to keep avoiding interest charges.

  • If you struggle with over-spending

Speaking of accruing interest, if you’re the type of person who struggles with over-spending, going into overdraft on their bank account or maxing out their credit card, a personal loan may better suit your spending profile. A personal loan may provide you with the funds you need for one event and limits you from accessing more credit than you’ve been approved for.

By having to maintain ongoing repayments for the personal loan, typically at a fixed rate, you also increase your likeliness of paying off this debt compared to accruing more debt with a credit card

  • When you have multiple sources of debt

A personal loan may also be a better financial option if you’re currently struggling with repayments on more than one source of debt, such as a car loan and a credit card. A debt consolidation personal loan allows borrowers to manage repayments more easily across multiple sources of debt. By consolidating these debts into one personal loan, you could reduce the amount of interest you accrue across multiple debts and simplify repayments significantly.

In comparison, a balance transfer credit card may be a helpful debt management option for those with credit card debts, but it offers little support for those with additional debt sources they cannot juggle, such as a car loan and a personal loan.

It’s important to keep in mind that whether you opt for a personal loan or a credit card, both are sources of debt. Consider setting a budget and establishing how you will afford repayments on a personal loan, or a credit card if you reached the credit limit, before applying for either option.

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Fact Checked -

This article was reviewed by Personal Finance Editor Georgia Brown before it was published as part of RateCity's Fact Check process.

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Learn more about personal loans

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.

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.

How are personal loans regulated?

Personal lenders in Australia are regulated by ASIC (the Australian Securities & Investments Commission) and must follow responsible lending rules. That means they can’t lend money without making “reasonable inquiries” about a borrower’s financial situation and ensuring the loan is “not unsuitable” for them.

How long do personal loans take?

Depending on the lender, some personal loan applications can be approved in as little as one hour, or you may need to wait until the next business day. If approved, you may receive your money on the same day, the next business day, or within the week.

Can I get a personal loan if I receive Centrelink payments?

It is hard, but not impossible, to qualify for a personal loan if you receive Centrelink payments.

Some lenders won’t lend money to people who are on welfare. However, other lenders will simply consider Centrelink payments as another factor to weigh up when they assess a person’s capacity to repay a loan. You should check with any prospective lender about their criteria before making a personal loan application.

Where can I get a personal loan?

The Australian personal loans market contains dozens of lenders offering several hundred different products. Personal loans are available through a range of institutions, including:

There are three main ways to access personal loans. You can go through a comparison website, such as RateCity. You can use a finance broker. Or you can directly contact the lender.

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 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.

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.

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.

Can I get a bad credit personal loan with a guarantor?

Some lenders will consider personal loan applications from a borrower with bad credit if the borrower has a family member with good credit willing to guarantee the loan (a guarantor).

If the borrower fails to pay back their personal loan, it will be their guarantor’s responsibility to cover the repayments.

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.

What causes bad credit history?

Bad credit history is caused by filing for bankruptcy, defaulting on your debts, falling behind on your repayments and having loan applications rejected. Lenders are wary of borrowers who demonstrate this sort of behaviour because it suggests they might struggle to repay future loans.

Borrowers with bad credit may find it more difficult to be approved for a loan, or they may get higher interest rates when they do get approved.