Personal Loan vs Credit Card

05/05/2020
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Credits cards and personal loans both get you extra cash when you need it, but which is ‘better’? The answer might be less obvious than you think. Here’s our breakdown.

Read more: The Avanti Finance Personal Loan Guide: Everything you need to know about receiving, spending and repaying personal loans.

 

PERSONAL LOAN

 

How do you get your money?

After your application for a personal loan is accepted, the funds are released in one lump sum. If you need more, you have to apply again, either for a new loan or for a ‘top up’.

 

How much can you borrow?

The amount you can borrow with a personal loan varies from lender to lender. It can range from thousands of dollars to hundreds of thousands of dollars. How much you can borrow also depends on your credit score and whether you have an asset, such as a car or a house to put up as security against your loan.

 

How do you repay a personal loan?

You pay back a personal loan every week, fortnight or month. It’s a fixed dollar amount each time. After a few years, the initial amount you borrowed plus the interest charged will be completely paid off, and the loan is done. The loan then closes, and you’ll need to apply again to borrow more.

 

How much interest will you pay on a personal loan?

The amount you pay in interest on a personal loan compared to a credit card will usually be lower. You can lower it further by providing security on the personal loan, like a car or a home. Interest.co.nz provides guidance on how much interest you should expect to be charged.

For more information about security on a personal loan, check our guide to unsecured personal loans

 

What is a personal loan used for?

If you have an unsecured personal loan, the money can be used for anything, whether it’s a single large purchase like home maintenance or upgrades, a holiday or a wedding. Some people also use them for debt consolidation.

A secured personal loan is more specific. A car loan is used to buy a car and a home loan is used to buy a home. You’ll often see these separated from ‘regular’ personal loans as auto loans and mortgages.

 

PROS AND CONS OF A PERSONAL LOAN

 

Pros

Cons

Good for large purchases

Sometimes has extra service fees

Offers a lower interest rate than a credit card

Usually can’t get more money from the loan without another application

Gives you the money up front in cash

 

 

CREDIT CARD

 

How do you get your money?

Once your application for a credit card has been accepted, you are given an account with a ‘credit limit’. You don’t get this amount in cash. Instead, you can spend on your credit card up to this credit limit. If you reach your limit and need more, then you have to apply to increase it.

 

How much can you borrow?

The amount you are approved for on a credit card depends on lots of factors. This includes who you get the credit card from and your credit score. Most of the time, credit limits will be up to the value of a few thousand dollars, potentially up to tens of thousands.

 

How do you repay a credit card?

Most credit cards will have a minimum monthly repayment that you must meet. This is sometimes a percentage of the balance currently on your card, or a fixed minimum amount, whichever is the larger. This means that the amount you pay each month changes as your balance does. If you have $1,000 owing on the card, your repayments would be lower than if you had $10,000 owing on it.

You can also usually make extra repayments on a credit card balance whenever you like. If you suddenly have some spare cash, this means you can pay off your debts and reduce the amount of interest you pay.

 

How much interest will you pay on a credit card?

Credit cards usually have a higher interest rate than a personal loan. Interest.co.nz provides an up to date overview of how much you should expect to be charged.

 

What is a credit card used for?

Just like an unsecured personal loan, a credit card can usually be used to pay for anything you like. People use them to pay for small to medium purchases, depending on their credit limit. This includes everyday costs like groceries to one-off large purchases like gifts and concert tickets.

This is quite different from a personal loan, which is usually used to make one large single purchase. Credit cards are more flexible and so they are often used for more casual costs.

 

PROS AND CONS OF A CREDIT CARD

 

Pros

Cons

Convenient, you have that amount of borrowing on hand at any time and can make extra repayments

Higher interest rates.

 

Don’t have to apply to get extra funding, as long as you aren’t near the credit limit.

Can’t borrow as much.

 

Only get charged on the money that you’ve used - you have more control.

Fees for cash advances and similar.

 

Typically easier to get for people with poor credit.

 

 

 

IS A CREDIT CARD OR PERSONAL LOAN BETTER?

Both credit cards and personal loans have their place.

If you want a car or a single one-off purchase, a personal loan is generally cheaper. But they also aren’t as flexible in repayments and extending credit as credit cards. It’s best to be sure of the price of something (like a car or a home) when using a personal loan.

Credit cards are useful for smaller purchases. Credit limits will stop you from making as large a purchase as you could with a personal loan. Plus they are more expensive and you need to have good financial discipline to keep paying them off. And because your repayments change, you could get hit with bill shock if you spend a lot in a short amount of time.

Is a personal loan the right choice for your needs? Start your application with Avanti Finance today.

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