When you have to pay for something, you probably use cash, especially for everyday expenses. But where do you seek help for your next big purchase? With utility bills and debt in the way, you cannot always save money with a savings or long-term deposit account. If you are among many Australians who require a quick cash injection, you’re probably considering either taking out a personal loan or using your credit card.
Loans and credit cards have many similarities. You can use both of them to pay for your purchase, and you will be charged with interest and other fees. Of course, you will need to pay the money you borrowed. However, there are a few distinct differences between these two. Pay attention to the pros and cons of these choices to determine which can give you a manageable repayment option and which can lead you to an uncontrollable debt.
A significant dissimilarity between a personal loan and credit card is their type of credit. With a credit card, you:
Meanwhile, with a personal loan, you:
The differences outlined above should help you decide easier because you will get to know the main characteristics of credit cards and personal loans.
Credit cards have become extremely useful to Australians over the past several decades. They are a critical part of the payments system in the country. With almost 16 million credit cards in circulation and more than 19 million accounts in 2018, the Reserve Bank of Australia confirms that nearly all adults have one credit card.
This downloadable spreadsheet from the RBA shows important figures concerning how Australians use their credit card each month. From January 2002 until January 2019, there were at least 10,000 new accounts. Since 2015, there were more than 80 institutions with 260+ credit card products.
About two-thirds of transactions in the country that do not involve cash are accounted for card use. In 2015 alone, credit card transactions averaged $24 billion monthly. Interestingly, the outstanding credit card debt during the same period amounted to $51.5 billion. Of which, $33.1 billion debt continued to accrue interest.
The problem is that most people do not understand what credit cards are for. They are best used for smaller expenses that you can pay off quickly. It’s recommended that you pay off the bill before the due date, so you essentially get a free short-term loan. Credit card companies do not charge interest if you have no month-to-month balance.
When you pay off your credit card dues early or on time, you can even use a rewards card to benefit from your account. The important thing here is discipline. You do not want to start spending more than you can pay off. Aside from the debt, there are interest payments you need to worry about, which do not make credit card debt worth the trouble.
So, where should you use credit cards instead? Here are some suggestions:
Should you use your credit card for a big purchase instead of a personal loan? Let us take a look at the benefits of using a credit card:
On the flip side, credit cards come with a warning. Using the plastic is so easy that you could be tempted to spend more than you can afford. It’s the biggest disadvantage of all. You could fall into an even larger debt that becomes difficult to escape from since interest and penalty fees continue to accumulate if you could not repay your debt.
Another huge disadvantage is that you could be satisfied with paying off with the minimum payment. Unfortunately, you end up spending more on the interest, and you will discover you have been paying off the same balance for several years. That does not even include the additional charges you make on the card.
Unlike credit cards, you do not have ongoing access to funds with a personal loan. You will receive the amount you borrowed and approved for, which will not refresh once a certain amount is repaid. You get a lump sum payment upfront, which you should repay in full over time through a scheduled arrangement. Once fully paid, you can retire the loan or even take out another.
About eight million Australians had applied for a personal loan at least once in their life. In November 2020, personal loan consumers rose 13.2%, perhaps due to the attractive rates. According to the RBA, the average variable interest rate is 14.41% while fixed loans averaged 12.42%.
If you already have a good credit score, you can enjoy a lower interest rate. A personal loan can either be secured or unsecured, which you can use to fund other purchases, including:
An unsecured loan is not backed by collateral while unsecured means you should provide security to get the loan. Collateral can be anything from your house to your car. If you fail to repay your loan, the lender has the right to take that specific asset. However, it offers better rates and easy approval for borrowers.
Should you take out a personal loan? Let’s take a look at its benefits of a personal loan:
Taking the positives above, compare them to the disadvantages of a personal loan:
If it is a secured personal loan, your house, car, or whatever asset you put up will be taken away from you.
Both credit cards and personal loans require good payment habits. When it is time to pay off the loan or your credit card expenses, be prepared to provide the amount needed. With a credit card, you can opt to pay just the minimum required amount. On the other hand, you may be able to delay your payment for your personal loan but be prepared for extra charges.
More often than not, credit cards are recommended only for small, ongoing purchases. If you have a large purchase that you cannot pay off within a month, you are better off with a personal loan.
Financial decisions are among the most significant tasks you could face. That’s why you should only decide after carefully considering your situation, needs, and budget. While credit cards are a good way to enjoy some flexibility in your cash flow, you should be vigilant with your spending habits. To avoid any issues, always pay off the outstanding amount while it’s still interest-free.
Meanwhile, personal loans are useful if you have an upcoming big purchase that you can pay off for months or even years. They are an excellent option to control your existing debt. As long as you continue paying the loan on time, you can build a good credit score, which will help you get better offers in the future.
Loans Unlimited are Perth and Western Australia’s premier loan and finance brokers. We have helped thousands move towards their financial goals by offering lower rates and faster approvals when it matters. Financial services are provided by Total Biz Pty Ltd T/A Loans Unlimited ABN 78 624 937 882 ACL 506875.
* The comparison rate shown is for a secured loan amount of $30,000 over a term of 5 years based on monthly repayments. Warning: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.
Any calculations or estimations do not constitute an offer of credit or a formal credit quote and is only a calculation of what you may be able to achieve based on the information you have entered. It does not take into account suitable product features or loan product types. Rates + repayments shown are based on user inputted data. All applications for credit must be verified prior to the formal assessment process. All applications for credit approval are subject to lender credit approval. Approval is not guaranteed.
