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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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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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