So you know you need to borrow some money, but what type of credit should you apply for? The answer to this question is entirely dependent on your situation. The best way to make this decision is to ask yourself: How much do I need to borrow? What can I afford to pay back each period? What is the money for?

 

When is a credit card better suited than a loan?

Credit cards are a form of ‘revolving’ credit, which means that you can borrow money up to a pre-determined limit, repay some or all of the debt, and then borrow the money again.

Credit cards are useful for regular spending and borrowing smaller amounts. They are also a good option if you are unsure how much money you need to borrow, or if you need more flexibility in terms of repaying the debt.

Credit cards can also be useful when you need to pay for things overseas – although you may be charged a currency conversion fee or ATM fees – and are also a good backup in emergencies.  Another plus of credit cards is that they can be linked to rewards programs where you can earn points when you spend money and trade them in for cashback, goods or travel etc. Many cards also offer complimentary insurance covers for your purchases and overseas travel.

 

When is a personal loan better suited than a credit card?

A personal loan is a more structured form of borrowing where you receive a cash lump sum and then repay it, plus interest, in equal installments over a set period of time.

A personal loan may suit better if you need to borrow a large amount of money and know that you have the ability to make regular repayments.

Typically you are able to borrow more money with a loan than you would be able to on a credit card, and potentially at a lower interest rate.

Providing you can make the repayments when they are due, your loan will be repaid at the end of the loan term.  Loans take some discipline as, unlike with credit cards, you can’t re-borrow the money you’ve repaid.

 

Repayments – what are the differences?

Credit cards
  • Have to make a minimum repayment each month (usually calculated as a percentage of the outstanding balance)
  • Can usually make extra repayments at any time for no charge
  • If you only repay the minimum each month, it will take a long time and a large amount of interest to clear the debt
  • If you miss a payment you will usually be charged a penalty or late fee – if you let this slip further it can turn into a default – both late payments and defaults can be recorded on your credit file and may affect your credit score

 

Personal loans
  • Have set monthly repayments over a period of time (the ‘term’ of the loan) – the longer the term, the more interest you will pay overall
  • You can pay off a loan early but some loans charge you a fee for any early/extra repayments
  • If you miss a payment you will usually be charged a penalty or late fee – if you let this slip further it can turn into a default – both late payments and defaults can be recorded on your credit file and may affect your credit score

 

Short Answer:

Credit cards tend to be better for short-term balances that you are able to pay off each month, while personal loans may be better for medium to long term larger debts.

 

 

Think you know what type of loan you need? Now it’s just a case of getting a good deal – you can compare hundreds of credit cards and personal loans on our comparison platform now!

Still unsure? Get smarter about credit and read more about Credit Cards and Personal Loans here in our Credit Knowledge Centre.

 

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