For those times in life where some financial bolstering is required, there are a number of concerns that wrestle for our attention. Taking out a loan or moving further into debt can fill us with apprehension. We want a solution where we can access adequate funds, yet not become swamped with oppressive repayments.
Whether the need to access extra funds arises from a planned holiday, emergency repair or a luxury indulgence, can have a significant influence on the best finance solution.
Three main considerations which struggle for priority are:
- Affordability – low fees and interest rates
- Flexibility – the ability to tailor the loan repayments to suit our budget
- Speed – quick access to funds
So let’s begin with a simple comparison between the advantages and drawbacks of both personal loans and credit cards.
Personal loans – cost, control, customise
Pros:
Affordability – Personal loans through an Australian Credit Licensed lender, will be substantially cheaper than using a credit card. This is especially true if you need cash. Most credit cards will slug you with cash advance interest rates often hovering around the 20% mark, whilst interest on a personal loan can be almost half that.
Flexibility – Repayments can be tailored to suit your needs. Making smaller payments over a longer period of time can substantially ease the burden of repaying a loan.
Personal loans can also furnish you with the ability to consolidate other debts into one single loan to save money and hassle–getting your debt paid off faster.
Transparency – A personal loan is a fixed term debt. The cost of the loan and the repayment schedule is clearly set out for you. This means that you can budget for a:
- Set repayment amount
- A fixed term (start and an end date)
- Fixed interest rate
These positives mean personal loans provide greater control. Customised to your needs, payments are debited at an agreed date and unlike credit cards, you aren’t weighed down under oppressive compound interest.
Drawbacks – the main downside of the personal loan when compared to credit cards is the perceived length of time it takes to apply for the loan. To counterbalance this many lenders are now offering online applications and fast turnaround times.
Credit cards – convenient call-on card
Pros –
Accessibility – the exceptional convenience of the credit card is it’s main overriding advantage. As an example, if you are travelling overseas and need money fast, you are hardly likely to apply for a personal loan. The portability of the credit card is its greatest asset.
Honeymoon rates – whilst some companies offer honeymoon rates of low or no fees, this is usually for a set period of time–often 12 months. If the expenditure cost can be paid off within this time period then a credit card may be the attractive option.
Travel perks – Credit cards are the ideal travel companion with some offering no fee currency conversions, concierge services and protection against theft or fraud.
Drawbacks – a credit card is a temptation sitting in your wallet. Credit card debt has hit an all time high, with Australian households currently carrying 52.5 billion dollars in debt. This creates a vicious circle–the higher you spend, the more you must pay back and the compounding interest can be oppressive–a mountain climbed but a summit never reached.
If you are susceptible to easy access spending that a credit card offers, then it may be a costly solution to your loan needs.
To summarise, there can be no clear winner in the personal loan/credit card debate. Just as every situation is different, so too is the solution. The final decision as to whether to finance using a credit card or personal loan is often situation specific. Considerations such as the amount of the loan and the speed which you can pay it back must be brought into play.
For those looking to purchase a smaller ticket item which can be paid back swiftly, then a no fee credit card may be your best solution.
Alternatively, for those seeking to finance a more substantial purchase, it may be advisable to turn their attention towards the longer term advantages offered by the personal loan.
Whichever you decide upon, be prudent with your budgeting. It will make repaying your loan easier in the long run and put less stress on you in the short term.