Personal loans and credit cards are both types of credit that let you borrow money to make a purchase. Here at Australia’s Defence Bank, we want you to know which might be better. A personal loan versus a credit card? It can hinge on your spending habits and your approach to managing money.
1. Personal loans – useful for big ticket buys.
When you take out a personal loan, you borrow a set sum of money repayable over a fixed term – usually 1-7 years.
Your lender will explain the monthly repayments, which are usually the same throughout the loan term, making budgeting easier. Once the loan term is over and the final repayment is made, you no longer owe any money.
These features can make a personal loan a useful choice for one-off high value purchases such as home renovations, a new appliance or a holiday.
Look for a low rate plus flexible features.
The trick to minimising the cost of a personal loan is to look for a low rate. Flexible features matter too. These can make your loan easier to live with while helping you save on fees and interest charges.
As a guide, Defence Bank personal loans allow fee-free extra repayments to help pay off the loan sooner and reduce interest costs, plus free redraw if you need cash in an emergency. And if you pay off the loan early, you won’t face any additional charges.
2. Credit cards – a line of credit that rolls over.
Credit cards work a bit differently. They act as a ‘revolving line of credit’. This means you can continually draw on your set credit limit, pay off purchases, and then use your card again for other buys.
Let’s say for instance, Sue has a credit card with a limit of $2,000. If she makes a purchase of $500 on the card, she only has $1,500 worth of credit remaining. But if she pays $500 on her next card repayment, her credit limit goes back up to $2,000. In this way, a credit card doesn’t have an end date in the way a personal loan does.
Pay no interest at all.
What’s especially handy about credit cards is that it’s possible to avoid paying interest altogether. Most cards offer a set number of interest-free days. For example, the Defence Bank Foundation Credit Card offers up to 55 interest-free days.
By paying off purchases within the interest-free period, you can enjoy the convenience of a card without interest charges. The key to this strategy is to only put purchases on the card that can be paid off within the interest-free period.
If you can’t pay off your card balance in full each month then a low ongoing interest rate will help you pay less interest, which is why it pays to know the interest rate on your credit card and the difference between a low rate credit card and a rewards credit card.
So, which is better?
Deciding when to use a personal loan versus a credit card comes down to knowing your spending habits. If you’re good at sticking to a spending budget, a credit card may be the best option. For large purchases that can take time to pay off, a personal loan could tick all the boxes.
Important note: This information is of a general nature and is not intended to be relied on by you as advice in any particular matter. You should contact us at Defence Bank to discuss how this information may apply to your circumstances.