Choosing between a personal loan or credit card?

If you’re looking to fund a larger expense, say a home renovation or automotive repairs, or you’re planning a wedding or honeymoon and you’re weighing up using a credit card versus applying for a personal loan, here’s how they compare.

Borrowing money with a personal loan may offer benefits over using your credit card, but personal loans aren’t without cons. Typically you’ll receive the money in a lump sum, making it easier to make a large purchase in some cases.

When applying for an unsecured loan, no asset is required to secure the personal loan and approval times can often be relatively quick.

Borrowing with a personal loan may come with a lower interest rate than a credit card if you can find a competitive deal by comparing a range of options.

With a personal loan, you’ll be given a set lump sum of money to spend. Unlike a credit card, where your credit is more revolving, it may remove some of the temptation to spend more money with your loan. Though remember, credit card providers may allow you to increase your spending limit — there is always the risk of spending outside your means with any type of loan.

Personal loans do have drawbacks and are not suited for every individual or situation. Some of the cons to consider before taking out a personal loan would be the interest rates. If you have a poor credit history or other debts, the interest rate and eligibility on a personal loan may not be all that convenient. And remember, you’ll only be adding to your debt.

Many personal loans may come with a range of fees and penalties that can quickly increase the cost of borrowing. Some lenders charge break fees if you pay the balance off before the end of your loan term. Be sure to research the terms and conditions of the loan you're considering to fully understand the fees that might be involved before applying.

Using a credit card will provide you with access to funds up to your credit limit, often making them useful for smaller expenses that you can reasonably pay off over a shorter period of time.

Credit cards provide flexibility and convenience in that they offer a continual line of credit that you can use, pay back and use again as you need it. Assuming you continue to pay off your card regularly and on time, you can continually spend up to your limit. Unlike a personal loan, you can only spend the fixed amount you’ve borrowed.

The downside is that because credit card debt is revolving, it’s essential to be careful not to overspend and create a debt you’re unable to manage. It’s can be a good idea to keep your credit card balance within a manageable amount that you can comfortably afford to repay.

Take the example of someone renovating their home. Should they decide to do the renovation gradually, they could spread the cost of the renovation out, and pay for it (and repay it) as they go using a credit card so that they don’t carry a large debt at any one time.

Generally speaking, credit cards may come with different interest rates than personal loans, but depending on the amount you’re spending and your repayment frequency, fewer payments with a higher interest rate may work out better over the long term compared to several longer-term repayments at a lower interest rate. This depends on your own circumstances, so it’s important to review your options in the context of the total cost of the loan or credit card.

If you want to avoid paying interest altogether, you’ll need to pay off your credit card in full before any interest free period expires. Alternatively, if you’re responsible with your budgeting and are confident in your ability to repay the amount you need in a short period of time, you might find that some credit cards offer an introductory honeymoon period with interest-free periods for the first year. This means that for that introductory period, you will pay no interest, assuming you make the minimum repayment on time.

Remember, aside from the interest charged on your credit card balance, credit cards may also come with additional fees, such as an annual card fee. There are often also additional costs for withdrawing cash — called a cash advance fee and a higher interest rate called the cash advance rate. This is charged in a range of circumstances, such as using the card for gambling or for withdrawing cash from an ATM.

Above all, if you’re considering a personal loan versus a credit card, evaluate your specific needs and know exactly how you’ll use the funds. For example, if you know exactly how much you’d need to borrow and you want repayment consistency for easy budgeting, a personal loan may be a suitable option. Alternatively, if you’d prefer a line of credit to pay off as you go, a credit card could be for you.

Whichever option you choose, it’s important to do your research to understand if either option suits your situation, and ensure you don’t borrow more than you’re comfortable repaying.

Everyone’s financial situation is different so there’s no one best option and certainly no one-size-fits-all solution. That’s why it’s vital to weigh up all the information as it pertains to your specific circumstances to determine what might be right for you.

There are many things to consider when weighing up the two. Do your due diligence by comparing multiple different products based on the rates, fees and features offered for both credit cards and personal loans. You should also read the terms and conditions to make sure you’re aware of all the fees, charges and fine print the lender might have.

The biggest difference between borrowing money using a personal loan versus using a credit card is that with a personal loan you’re able to access an approved lump sum of money upfront. When using a credit card, you’re subject to the credit card spending limit.

Both have their own sets of fees and charges to consider outside of the interest rate. Personal loans often have establishment fees and it might also have fees associated with repaying the loan before the agreed time frame, which is more common on a fixed rate loan.

Likewise, credit cards will likely have an annual fee as well as additional costs associated with withdrawing cash. As such it’s important to take a close look at these charges and review the terms and conditions to fully understand the fees before you borrow.

At the end of the day, whether you choose a personal loan or a credit card, it’s essential to remember that both options are still additional debt and as such it’s important to consider whether borrowing the money makes sense for your situation. If it’s an expense that can wait, perhaps setting a savings goal is a better option altogether?

Like all financial decisions, consider all your options and if you need to, talk to a financial professional about what might be the best option for you.