Personal Loan vs Credit Card: which one should I choose?

When comparing credit card vs personal loan options, it's important to understand that these are two distinct financial products designed to help you access funds when needed. A personal loan provides a fixed amount that you borrow upfront and repay over a set period with fixed or variable interest rates. Credit cards, on the other hand, offer a revolving line of credit that you can use repeatedly up to your credit limit, with flexible repayment options.
Key takeaways:
- Personal loans often offer lower interest rates for larger purchases
- Credit cards provide more flexibility and rewards for everyday spending
- Your choice should depend on the size of purchase and repayment timeline
- Both options have unique features that suit different financial needs
Remember, this is just general information that may not apply to everyone's situation. Different circumstances can affect loan and credit card terms, so it's always best to check the specific details with your provider.
How do personal loans work?
Think of a personal loan as a financial tool that lets you borrow a specific amount and pay it back in structured installments. Unlike some other forms of credit, personal loans in Australia come with clear terms and predictable repayment schedules.
Fixed term, interest and payments
When you take out a personal loan, you'll know exactly what you're getting into. The loan comes with a set amount and repayment period that suits your needs. You can choose between fixed interest rates, where your repayments stay consistent throughout the loan, or variable rates that might change over time. This predictability, especially with fixed rates, makes it easier to fit loan repayments into your budget.
They can be used for many purposes
Whether you're renovating your home, planning your dream wedding, consolidating existing debts, or covering unexpected medical expenses, personal loans offer the flexibility to fund various life needs. They're particularly useful for planned, one-time expenses where you know exactly how much you need to borrow.
Typically they're unsecured loans
Most personal loans don't require you to put up an asset as security, making them more accessible than secured loans like mortgages. While this convenience might mean slightly higher interest rates than secured loans, they typically offer more competitive rates than credit cards.
Flexible repayment options
Want to pay off your loan sooner? Many personal loan providers allow extra repayments without penalties, helping you save on interest costs over time. This flexibility lets you take control of your loan and potentially reduce your overall borrowing costs.
How do credit cards work?
Credit cards offer a different approach to borrowing, giving you ongoing access to funds that you can use, repay, and use again. Unlike personal loans, they provide more flexibility in how and when you borrow. Here's what you should know:
Revolving credit with flexible limits
Credit cards come with a pre-approved spending limit that can be adjusted over time based on your needs and creditworthiness. This revolving nature means you can continue using available funds without reapplying, making them convenient for ongoing expenses and unexpected purchases.
Smart features to help you save
Most Australian credit cards offer interest-free periods (typically 44-55 days) on purchases if you pay your balance in full each month. This feature can make credit cards cost-effective when managed well. However, any unpaid balance after the interest-free period will attract interest charges, which are usually higher than personal loan rates.
Rewards and premium benefits
Many cards offer extra value through reward programs, letting you earn points on your everyday spending. Some cards also include perks like complimentary travel insurance and purchase protection. While these benefits can be valuable, it's worth considering whether the annual fees and interest rates outweigh the advantages.
Freedom in repayments
Credit cards only require a minimum monthly payment, typically around 2% of your outstanding balance. While this flexibility can be helpful, paying just the minimum can lead to significant interest charges over time and make your purchases much more expensive in the long run.
Personal loans vs credit cards: pros and cons
When comparing credit card vs loan features, consider these advantages and disadvantages:
Personal loans
Pros
Cons
Lower interest rates compared to credit cards
Less flexibility in accessing funds
Fixed repayment schedule helps with budgeting
May have establishment fees
Larger borrowing amounts available
Fixed repayment obligations
No temptation to overspend
May have early repayment fees
Potentially lower overall cost for large purchases
Longer application process
Immediate access to money
Credit cards
Pros
Cons
Convenient for everyday purchases
High interest rates
Rewards programs and perks
Annual fees
Interest-free days on purchases
Easy to accumulate debt
Flexible repayment options
May encourage overspending
Immediate access to funds
Lower borrowing limits
Personal loans vs credit cards: when to use each one?
Whether you're weighing up personal loan vs credit card debt consolidation, or simply comparing loan and credit card options for a purchase, each can be good in different situations. Let's break down when to use each one:
When personal loans make more sense
If you're planning a major expense: Perfect for significant costs like home renovations, wedding expenses, or major car repairs where you know the exact amount needed.
If you want predictable repayments: Fixed repayment schedules help you budget better, especially for larger amounts over longer periods.
When you're consolidating debt: If you have multiple high-interest debts, combining them into a single personal loan with a lower interest rate can save you money and simplify your finances.
If you need a significant amount: Personal loans generally offer higher borrowing limits with lower interest rates than credit cards, making them more cost-effective for larger sums.
When credit cards work better
If you're managing day-to-day expenses: Ideal for regular purchases like groceries, fuel, and utilities, especially if you can pay the full balance monthly
When you want flexibility: The revolving credit nature means you can borrow and repay as needed without reapplying
When you want to take advantage of interest-free periods: Most Australian credit cards offer 44-55 days interest-free on purchases when you pay your balance in full
If you value rewards: If you regularly pay off your balance, credit card rewards and benefits like travel insurance can add significant value
Alternatives to personal loans and credit cards
Line of credit
A line of credit combines the flexibility of a credit card with features similar to a personal loan. It allows you to access funds whenever needed up to your approved limit, and you'll only pay interest on the amount you actually use. As you make repayments, your available credit replenishes, making it ideal for ongoing expenses or situations where you're unsure of the total amount needed. Interest rates are often lower than credit cards, offering better value for longer-term borrowing needs.
Payday loans
While payday loans offer quick access to cash during emergencies, they come with significant risks that require careful consideration. These short-term loans typically need to be repaid by your next payday and often carry much higher costs than other forms of credit. In Australia, payday lenders can charge an establishment fee of up to 20% of the borrowed amount and a monthly fee of 4% of the original principal. Due to these high costs and short repayment terms, payday loans should only be considered as a last resort after exploring all other options. Many borrowers find themselves in cycles of repeat borrowing, so it's crucial to have a solid repayment plan before taking one.
Home equity loans
For Australian homeowners who have built up equity in their property, a home equity loan can be an attractive borrowing option. This type of loan lets you borrow against the value of your home minus your outstanding mortgage. Because your property serves as security, interest rates are typically lower than unsecured loans or credit cards. Home equity loans can be useful for major expenses like renovations, which may increase your property's value, or debt consolidation. However, they come with serious considerations. Using your home as security means you risk foreclosure if you can't make repayments. They also often have longer approval processes and require property valuations, making them less suitable for urgent funding needs.
Buy Now Pay Later (BNPL)
Popular in Australia, BNPL services like Afterpay, Zip, and Humm have revolutionized how we handle smaller purchases. These services offer interest-free installment payments with quick approval processes. Most don't require formal credit checks, making them accessible to many Australians. While they're convenient for smaller purchases, it's important to watch out for late payment fees and understand that multiple BNPL accounts might affect your future borrowing capacity.
Secured loans
Secured loans use an asset as security and come in various forms. Car loans are specifically designed for vehicle purchases, while home equity loans let you borrow against your property's value. Other secured personal loans might use different assets as security. These loans typically offer lower interest rates compared to unsecured options, but remember that you risk losing the secured asset if you default on payments.
Overdraft facilities
Many Australian bank accounts offer overdraft options as a financial safety net. An overdraft provides a buffer when your account balance runs low, often with lower fees than credit cards for short-term borrowing. While they're useful for temporary cash flow gaps, they typically require a good banking history and relationship with your bank. They're best suited for occasional use rather than long-term borrowing.
Green loans
For environmentally conscious Australians, green loans offer specialized financing for sustainable purchases. These loans typically feature lower interest rates for products like solar panels, batteries, and energy-efficient appliances. Often supported by government initiatives, they might also come with tax benefits. They're an excellent option if you're looking to make your home more environmentally friendly while potentially saving on energy costs.
Bottom line: Personal loans vs credit cards, which one to choose?
Understanding the personal loan vs credit card comparison comes down to your specific needs, so here's a quick sum up to help you make your decision:
Choose a personal loan when: You know exactly how much you need to borrow and want the discipline of fixed repayments. This works particularly well for significant expenses like home renovations, debt consolidation, or major life events. If you're borrowing a larger amount (say, over $5,000) and want to spread the cost over several years, a personal loan's lower interest rates and structured repayment plan will typically save you money in the long run.
Go for a credit card when: You need flexibility for everyday spending and can commit to paying off your balance in full each month to take advantage of interest-free periods. Credit cards make more sense for smaller, regular purchases, especially if you can earn rewards points or cashback on your spending. They're also handy as a backup for unexpected expenses, provided you have a plan to pay off any balance quickly.
Bottom line: which one to choose, personal loans or credit cards?
The right choice between a personal loan and a credit card ultimately depends on your unique financial situation, but here's a practical way to make your decision:
Go for a credit card if: You need flexibility for everyday spending and can commit to paying off your balance in full each month to take advantage of interest-free periods. Credit cards make more sense for smaller, regular purchases, especially if you can earn rewards points or cashback on your spending. They're also handy as a backup for unexpected expenses, provided you have a plan to pay off any balance quickly.
Choose a personal loan when: You know exactly how much you need to borrow and want the discipline of fixed repayments. This works particularly well for significant expenses like home renovations, debt consolidation, or major life events. If you're borrowing a larger amount (say, over $5,000) and want to spread the cost over several years, a personal loan's lower interest rates and structured repayment plan will typically save you money in the long run.
Getting a personal loan? Choose Credit24.
At Credit24, we understand that when you need funds, you want a straightforward process without complex paperwork or long waiting times. We've designed our lending services to be fast, transparent, and tailored to your needs.
Quick, simple online application
Getting the funds you need shouldn't be complicated. Our 100% online application process takes less than 10 minutes to complete. Simply answer a few questions and provide basic details to verify your identity and income. If your application is approved, you could receive your funds within 60 seconds.
Flexible borrowing options
Whether you need a personal loan or a line of credit, we offer solutions that fit your circumstances:
- Borrow between $500 and $10,000
- Choose repayment terms up to 36 months
- Make extra repayments without penalties
- Pay less interest by paying off your loan early
Clear and transparent terms
We believe in being upfront about our loans. You'll know exactly what you're getting with us before you commit:
- Fixed repayment schedules shared upfront
- No hidden fees or surprise charges
- Clear rates
- Straightforward eligibility criteria
Responsible lending commitment
As a fully regulated lender by ASIC, we take our lending responsibilities seriously. We carefully assess each application to ensure the loan suits your needs and circumstances. This helps protect you from taking on unsuitable credit while still providing quick access to funds when you need them.