A personal loan might be worth the look for an expensive purchase
Choosing between a personal loan and a credit card is often tricky because they function similarly. However, both lending products have their fair share of positives and negatives and aren’t likely to be used for the same purpose.
If you’re having difficulties determining why a credit card or personal loan would be better for you, this article will help iron out the details.
What is a Personal Loan?
If you’re currently comparing personal loan rates in Australia, you likely realized they don’t require assets or collateral before approval. Since personal loans are unsecured, you can apply for one and get approved within 24-hours.
Personal loans offer a fixed amount of finance that the debtor pays back in installments over a set period ranging from a couple of months to several years.
Borrowing Amount: Set
The biggest difference between a credit card and a personal loan is that they’re approved for a set amount. With a personal loan, you’ll receive a lump sum at the beginning of the loan’s term. These funds act like revolving credit, so debtors won’t have to apply for more money later.
Interest Rates and Repayment Terms
Personal loans often have higher interest rates than secured financial products, but they won’t be as high as a credit card.
On average, most Australians will pay 14.41% for a varial personal loan and 12.42% for a fixed personal loan. Although you have the potential to pay less in interest rates with a variable loan, you can keep track of your payments more easily with a fixed term.
Variable-rate loans also give the borrower access to a redraw facility feature, which is an initial down payment on the loan that you can pull from to use when you really need it.
Charges and Fees
Personal loans will come with an application fee, but that’s the extent of what you’ll pay.
What is a Credit Card?
Borrowers will use a credit card to build credit over a short period of time, but credit cards are much more useful than that. Credit cards are another unsecured lending product that allows the borrower to access funds up to a specific limit. It can be used for daily expenses, such as smaller purchases or monthly bills, that the borrower can pay off each month.
Borrowing Amount: Flexible
Credit cards offer the borrower a lot of flexibility as they act like a line of credit and an infinite amount of loaned money provided you have good credit.
Unsecured credit cards can start at $500 (on student cards) and can run into the millions. While personal loans have a limit on how much you can spend, credit cards let you spend up to its available balance.
Know that credit card debt is considered “revolving,” which means you could land yourself in serious financial trouble if you don’t watch your spending habits. It’s better to apply for a credit card that fits your spending habits rather than prioritizing money you wish you had.
Interest Rates and Repayment Terms
It’s expected that a credit will come with a high-interest rate that’s typically 18.99-21.99%, which is much higher than personal loans. To avoid paying a penalty fee on your credit card, you need to make a minimum monthly payment. To waive your interest rates, pay off the card’s balance.
Charges and Fees
Most high-value credit cards will charge an annual card fee. Almost all credit cards will charge you additional fees for a cash advance or when you transfer between lending products.
Personal Loan vs. Credit Card: Which is Better?
If you have control over your spending habits, a credit card is better for smaller purchases. However, if you’re looking to buy a more expensive item, a personal loan is worth a look.
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