Personal loans and credit cards can be tempting as they allow you to fund your backyard makeover or purchase your sleek sedan NOW. But as you know there’s always a catch and with banking products it usually comes in the form of an interest rate that has the potential to burn a massive hole in your wallet.
To help you decide on your money match, we’ve crunched the numbers on three borrowing options – a personal loan, low rate credit card and 0% purchase rate credit card – to see which is cheaper if you borrowed $10,000 and made $313 monthly repayments over 3 years.
IMB Secured Personal Loan: 7.94% fixed interest rate
Interest paid over 3 years: $1,272
Setup costs: $175 (application fee)
Total repaid: $11,447
Who’s it good for? Borrowers who want to pay down the debt in the agreed timeframe and budget for repayments with a fixed rate.
But watch out for…early repayment penalties and termination fees on some personal loans.
Low rate credit cards
Community First McGrath Pink Visa: 4.74% intro rate for 9 months, then 8.99%
Interest paid over 3 years: $1,114
Setup costs: $120 (annual card fee over 3 years)
Total repaid: $11,234
Who’s it good for? People looking to pay as they go with repayment flexibility.
But watch out for…the temptation to spend more than you normally would and get into a higher level of debt.
0% purchase rate credit cards
NAB Low Rate Card: 0% purchase rate for 12 months, then 13.99%
Interest paid over 3 years: $904
Setup costs: $177 (annual card fee over 3 years)
Total repaid: $11,081
Who’s it good for? Diligent savers looking to pay as they please and enjoy an interest free period.
But watch out for… splashing out without the savings to pay the balance back.
Once the numbers were tallied, in our scenario the 0% purchase rate credit card was found to be the cheapest option costing $904 in interest, followed by the low rate credit card at $1,114. Whereas the personal loan option was the most expensive option at $1,272. That’s a difference of $368.
However, we should point out the interest rate isn’t the only consideration when selecting the right banking product for your needs, you also need to be very real about how disciplined you can be. Too often with credit cards its easy to spend more than you initially planned (or make extra purchases along the way), and then you fall into the trap of making lower repayments which can stretch out the time it takes to repay your debt.
By comparison, the fixed interest rate attached to the personal loan means you can budget for your repayments, as they will stay the same over the life of the loan and it could end up being a much cheaper option in the long run.