Russell Ward Finance Writer
In a time of “right here, right now”, we often find ourselves in situations where we want or need something right away sometimes when we don’t have the available cash to make that purchase. In these instances, borrowing money, whether via personal loan or by using a credit card, can seem like the best option, particularly if it’s for a large, longer-term expense. But which option is more beneficial and does it really matter? We unpack the jargon and compare the two.
How do personal loans work?
Typically, you apply for a fixed amount and receive that in a lump sum once approved. You then make the same monthly payments for an agreed term and against a fixed interest rate. Nowadays, most applications can be made online, assuming you have the right background information to hand. Personal loans can be secured, meaning that your car or home can be used as security for the bank to get you a cheaper rate, or unsecured, which means you’ll have a higher rate but you don’t need to provide an asset as security.
How do credit cards work?
Credit cards are an approved amount of credit that you borrow against whenever you like. Again, applications can be made online or in person and you receive a credit limit on your card that you can borrow against and then clear each month or carry a balance forward into the next month. If you do not clear the amount, then you’ll pay interest on that ‘carried over’ debt but you will still be able to make new purchases if they fall within your credit limit.
So, which option is better for you?
If you need that little bit of convenient money to hand when you’re making regular, smaller purchases, such as buying groceries or filling up the car with fuel, then a credit card can give you that instant access to additional funds. What’s more, if you manage the debt and make your repayments on time, clearing the full card amount each month, you only pay what you spent on and you won’t pay any interest at all.
With a personal loan, you’ll always pay interest on the overall lump sum amount; however, loans are more effective for ‘one-off’, larger purchases, such as a car or holiday, because the interest rates are often lower than with a credit card. Loans are also easier to manage – you already know what the purchase will be and you won’t be tempted to over-spend. You then borrow the amount over a fixed term and fixed interest rate, make that one-off purchase and know exactly what you’ll pay each month. It’s manageable and you know where you stand, whereas a credit card can easily get out of control if you don’t track your spending and clear the balance each month.
Of course, much depends on your financial situation and what you plan to spend on. You might find that the structured set-up of a loan is better for managing your repayments at a lower interest rate, especially if times get tough financially.
Whatever your choice, ensure you will be able to make the repayments on either a credit card or personal loan, only spend what you can realistically pay back, make sure you’re getting a competitive interest rate and familiarise yourself with the terms and conditions of the card or loan you eventually opt for.
About the author
Russell Ward is a professional business writer who has been published in The Huffington Post, The Telegraph, CEO Magazine, Global Living, Mamamia and Thought Catalog.
Please note that this article is not financial product advice and does not take into account any person’s individual objectives, financial circumstances or needs.