Have you ever needed a short burst of extra cash, maybe to pay for that trip overseas or make some improvements around the house? You probably asked yourself “should I pay for it on a credit card or just take out a personal loan? What is the difference between the two and most importantly, which one will be the cheapest for me?”
To settle the dispute we put them in a ring and let them fight it out to see which option comes out as the cheapest way to borrow.
We sought out three competitors with the lowest interest rates in their division:
1) Personal Loan – Catalyst Mutual Unsecured Personal Loan with an 11.99% interest rate
2) Low Rate Credit Card – Community First McGrath Pink Visa with an ongoing 9.50% interest rate
3) Intro Rate Credit Card – Citibank Clear Platinum the cheapest intro rate credit card at 0% on purchases for 6 months then 11.99%.
Personal loans basically act like a line of credit that is paid back over a
fixed period of time with agreed monthly repayments, forcing you to have a good budgeting discipline.
Pros – Usually approved much quicker than a credit card, so you’ll have access to the cash a lot quicker. Structured repayments that require the same payments every month, so you can’t be tempted to relax your budget.
Cons – Not as flexible as a credit card, you may not be able to pay extra in a given month and you could actually end up penalised for paying back the loan early.
Although taking longer to be approved a credit card gives you access to a line of credit that is far more flexible in repayments and how you can use it.
Pros – You can adjust your repayments to suit your monthly budget. The trick to using a credit card is to make sure you pay more than the minimum monthly repayment.
Cons – Credit cards only require you to make a minimum repayment each month from as little as 2% of your total balance. If you’re prone to overspending and not very good at budgeting, your debt could soon spiral out of control.
Low Intro Rate Credit Card
Exactly the same payment plan as a regular credit card but with an enticing introduction interest rate of 0% that then reverts back to a higher ongoing rate after the intro period
Pros – All the pro’s of a credit card but with a big plus of no interest charges for the first 6 months.
Cons – Once the introductory period is over the regular interest rate can be higher than other credit cards, so you may be paying back a lot more over the long term
We took all the competitors and gave them the same handicap – borrow $5,000 and make monthly repayments of $450 to repay the full amount in 12 months.
The credit card with a 0% introductory offer reverting to a low ongoing rate came out the champion, this would be the cheapest loan you could get repaying just $172 over 12 months. Throwing swift quick repayments was the key to success in this round. Results would be different if this had been an a long term endurance challenge.
The standard low rate credit card put up a good fight costing only $295 in interest and fees over 12 months, managing to still pull the rug out from under the personal loan. The result could have been different if the repayments had not been disciplined.
Personal loans were knocked out cold as the most expensive option for short term borrowing, with a total cost of $452 in interest and fees over 12 months.