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Choosing between a personal loan and a credit card

You’re beginning to plan your wedding and you need to start paying suppliers. Perhaps you need to break free of the daily grind and go on that family vacation or new year, new you retreat. Maybe you backed into a pole at the shopping centre car park and you need to make a few vehicular repairs.

Whatever the case, you’re a bit strapped for cash at the moment and you’re looking to borrow. Two of the common forms of short term borrowing are a personal loan and a credit card, but which is the best option?

Let’s first look to these options side by side before deciding on which may be best.

Personal Loans

Personal loans allow you to borrow an amount and pay it back over a pre-determined period of time. It can give you a cash sum of money to spend as you need, subject to approval.

It’s A Lump Sum

When you apply for a personal loan you will receive approval for a maximum amount you can borrow. Once processed, you will receive that amount as a lump sum. The minimum and maximum will also depend on your lender. You’ve now got the money, you can go ahead and put that deposit down on your dream wedding venue.

Pay It Back Over The Term

Personal loans are short term borrowing and often you will have between one and five years to pay back the loan. Be sure you select an appropriate length based on your circumstances.

Your loan will be subject to repayments of principle and interest. You may select between a fixed and variable rate.

Anything else?

Personal loans are usually subject to an application fee and may incur a monthly fee. Be sure to be aware of any additional costs.

Credit Cards

Credit cards are one of the most common forms of borrowing with 13,720,900 active credit cards in circulation in Australia as of October 2020. They are a more transactional form of borrowing.

It’s About Flexibility

A credit card is a revolving line of credit. What that means, is you can continually borrow and repay within a designated credit limit. This can be used to make small or large purchases, from groceries to paying for those luxury hotel stays.

Credit cards are usually used for purchases and payments, although some cards may give you an option for cash advances. This may well be charged at a higher rate than your standard credit card interest, so it’s best to know all the T&Cs.

Pay Back What You’ve Spent

With credit cards, you will receive a monthly bill with transactions from that period. Typically, you will have until the due date before you are charged any interest on the amount owing. So if you’ve spent within your budget, you can borrow money without any interest payments.

Many cards will have a ‘minimum repayment’ listed on the bill, which is the minimum payment you can pay without a late fee. It’s important to know that the difference will start to accrue interest and may impact the interest free nature of further charges.

Anything Else?

Some credit cards offer reward programs and premium features which, if relevant, can be an additional perk for credit card holders. Many credit cards may have an annual fee which may vary between lender and product.

So Which One Is Best

Personal loans are generally suited to larger financial purchases where you may need a bit longer to pay off the sum. Generally, they’re a sound option if you have a large expense with a set cost. Personal loans can be unsecured, or secured to allow you to borrow more, whilst credit cards are considered unsecured debt.

Unlike a personal loan, if you decide you want to ‘upgrade’ that holiday or wedding package, credit cards can help close the gap. The flexibility of credit cards can make them a double edge sword – fantastic if you can budget and control your spending, but a challenge if you use it outside of your means.

Regardless, both are a form of debt so ensure you stay on top of your repayments and you operate within your budget.

 

Disclaimer: The ideas, discussions, options and details expressed in SCCU Blogs are for general informational purposes only and are not intended to provide specific personal advice or recommendations for any individual or on any specific security or investment product. We intended only to provide education about the financial and banking industry to make the complex simple, and help everyday customers realise their dreams.

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