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What costs more? A large personal loan or a credit card?

What costs more? A large personal loan or a credit card?

To answer to this question, it comes down to a number of factors and will depend on your unique situation.

The factors include:

What interest rate is applicable to the credit card and personal loan

Make sure you find out if the annual interest rate is variable (can change) or is fixed. Also, for credit cards, some may have an introductory lower rate to attract you, but it then may increase after a certain period, sometimes as short as 6 months.

What fees are applicable to the credit card and personal loan

Obtain the full set up costs, and remember for credit cards there is usually an annual fee to be added each year.

Make sure you understand the credit card interest monthly charges, how much the late payment fees are on both, and if the personal loan has any monthly or early repayment fees. (Note: At Fair Go Finance we have no early repayment fees.)

How long you take to pay it back

For credit cards you will need to be disciplined to clear your debt, otherwise if you keep it for longer than you would have done with a personal loan, this means you will end up paying more interest (unless you are clearing your balance every single month.)

What you are needing the credit card or personal loan for

Comparing a credit card to a personal loan is a bit like comparing an apple to an orange, because they really are designed for different uses. Here’s a quick review.

What is a credit card designed for?

Credit cards ideally are for people who like to purchase items (or pay bills) now, and then clear the amount once they are paid. As an added attraction, many credit card providers have a rewards scheme attached, so the more you use your card, the more rewards you can earn.

The greatest benefit of a credit card is, as long as you pay the whole balance back within the grace period from 25 – 40 days then you won’t pay any interest. However, if you don’t pay the full amount back, you will incur interest charges and fees if you are late.

Also, credit cards are an ongoing credit facility, so if you have a limit of $5000, you can re-use it over and over, up to this limit.


What is a personal loan designed for?

A personal loan is money borrowed from a lender to help pay for a personal expense (such as a holiday, housing bond, medical expense, consolidate debts etc) which is then paid back over a set length of time with set repayments.

Personal loans cannot be re-used, so you borrow the money once, and then you repay it.

Knowing each of their purposes, you should be forming an idea of which one is more suited to your specific need. 

To help you work out which way to go, answer the following questions:

What is my credit like – would I be eligible for a credit card or personal loan?

Your credit score and history will greatly impact your ability to obtain a credit card or personal loan.

If you have very good credit, then obtaining either should be achievable. If you have bad credit then generally a credit card will be harder to get than a personal loan because it does not have structured repayments and can more easily get out of control.

For personal loans, as they are designed to be repaid over a set term and there are lenders such as ourselves, who are able to consider both good credit customers and bad credit customers.

If you have good credit then you will be rewarded with a lower interest rate. If you have bad credit, we may still be able to assist you with a loan. Top find out more about bad credit loans, take a look at our bad credit loans page.

OUTCOME: Before you consider the costs, find out what your credit score is to get an understanding of what you’re currently  eligible for.  

credit card or personal loan

Do I ever overspend?

If you’re easily tempted to spend money, then choosing a credit card over a personal loan could cost you far more than you first thought.

Although there are 0% purchase rate credit cards out there which sound appealing, if you splash out and don’t clear the debt within the interest free period, you will be hit with interest charges and can potentially accrue a debt that is hard to get rid of.

OUTCOME: Be realistic as to the type of spender you are. If you splash out regularly, credit cards may be too much of a temptation and could cost you more in the long run.


So what really costs more?

The bottom line is, there are times where a credit card can be cheaper overall (if managed responsibly and the balance is cleared monthly) and times where a personal loan is the best option.

Keep in mind there are risks with using a credit card, mainly because you’re not required to repay the debt. Many people get caught maxing out their limit over and over again.

Ultimately you need to consider each option to know which one suits you best. As a personal loan provider we see many examples of customers who start with a credit card, but have eventually had to repay it with a debt consolidation loan, due to overspending and finances getting out of control.

Why not also read our blog “Why choose a personal loan instead of a credit card” before you decide?

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