Personal loan VS credit card: How to decide which path to take.
We often face the dilemma of choosing between a personal loan or a credit card, which can both be handy for different purchases, but how do you decide which one is best for you?
While they both have their perks and drawbacks, it’s essential that you know which one is right for you as this could save you thousands in interest repayments.
With personal loans, the key benefits are that you’ll generally enjoy a lower interest rate and having a repayment schedule means your debt comes with an end date.
On the flip side, however, personal loans may have a longer application process and you’ll typically carry the debt for a longer period of time.
Credit cards, on the other hand, come with a range of useful features like the ability to earn rewards or frequent flyer points or balance transfer options for when you need to consolidate existing debt.
However, credit cards normally have higher interest rates which means you may end up paying much higher interest costs.
When tossing up between a personal loan or a credit card, keep the following in mind;
The reason for your purchase will have a bearing on the type of product you decide to sign up for.
As a rule of thumb, personal loans are normally suited for large one-off purchases or for when you need to borrow over an extended period of time.
Whereas credit cards are normally useful for smaller purchases and shorter-term debts.
Interest rate and fees
During your comparison, you’ll also need to consider the interest rate and fees attached to the product.
This will give you a picture of the total cost of the product.
Credit card application fees can average at around 17 per cent while personal loan rates float around 10 per cent.
With personal loans, consider charges like application fees and ongoing account-keeping fees, and for a credit card, check out the annual fee, some credit cards have an annual fee of up to $350, but it is possible to find cards with a $0 annual fee.
When selecting the right product for your needs, think about how disciplined you are with your repayments.
If you think you may be tempted to increase your credit limit, then a more structured payment plan like one offered with a personal loan, may be more suitable.
On the other hand, if you’re looking to consolidate a small amount of debt or fund a small purchase, a credit card may be better.
Loan amount (and product eligibility)
The amount that you need to borrow will also help you decide between a personal loan or credit card.
For an unsecured personal loan, you normally can’t apply for more than $55,000, so keep this in mind when making your choice.
Additionally, you’ll need to read the fine print when it comes to eligibility for each product.
For instance, with a personal loan, you’ll need to have a good credit history in order to qualify and for a credit card, you may need to be earning between $15,000 – $30,000 per year.