Personal loans vs credit cards

When looking for a credit option to fund a big upcoming expense like a holiday, home renovation or wedding, two banking products are likely to come to mind – a personal loan or a credit card.

Choosing between a personal loan and a credit card can be tricky because they both have their pros and cons and suit different types of borrowers. Here’s a breakdown of the two options:

Here are some things to consider when taking out a personal loan:

Set borrowing amount:

When you take out a personal loan, you’ll be approved for a set amount, which means you can’t spend more than that amount should temptation kick in, like with a credit card.

• Example: Jenny is looking to renovate her kitchen and has been quoted a fixed price by a contractor. As she knows exactly how much the kitchen reno will cost and only needs the money for this purpose, she decides that a personal loan is the best option for her.

Mozo tip: To ensure you always make your loan repayments, set up a regular direct debit from your bank account to the lender to line up with your usual payday. That way, your repayments are already taken care of before you can touch your pay.

Interest-free cash withdrawals:

Unlike credit cards, which come with high cash advance rates if you withdraw money from an ATM – withdrawing cash from a personal loan is typically far cheaper, so you won’t be penalised for making this transaction.

• Example: Engaged couple David and Maggie need to pay some of the suppliers for their upcoming wedding in cash. They know they’ll be charged a steep cash advance rate for withdrawing cash from a credit card, so they decide to take out a low-rate personal loan instead. David and Maggie look for a personal loan that allows extra repayments and can be paid off early, so once they receive their wishing-well money from guests, they can put it straight into the loan.

Consistent repayments:

One of the perks of having a fixed-rate personal loan is that it’s easier to budget for your regular repayments, as the amount will stay the same for the life of the loan. On the other hand, credit cards have variable interest rates, which can change with the market.

• Example: George is planning his first big overseas vacay and is on a tight budget. Going for a fixed-rate personal loan means he’ll be able to budget for his repayments each month and can travel with the peace of mind they won’t change.

Mozo tip: Just be mindful if you’re thinking of making extra repayments on a fixed-rate loan, as some come with the bite of a break cost fee, which can often be quite high.

Start comparing personal loans below:

Now that you've had a quick rundown on some of the benefits of a personal loan let’s check out the plastic alternative. Here are some of the pros of a credit card:

Honeymoon periods & interest-free offers:

One thing to look for when taking out a credit card is one that has a good interest-free offer. Having a credit card that comes with an introductory interest-free offer means that for a set period, you won’t pay any interest as long as you make the minimum monthly repayment.

• Example: Kelly has some car maintenance coming up and needs to pay for everything from the rego through to the green slip. While she doesn’t have the money upfront, she knows that she can pay it back over a period of 12 months. So, she applies for a credit card with a 0% intro rate offer for the first year and works out how much she needs to pay each month to pay it off before the card reverts to a higher rate.

Flexibility:

Credit cards are one of the more flexible finance options as they act as a line of credit that you can draw on as you need. Personal loans, however, are very structured and only let you borrow a set amount and pay it back over an agreed period.

• Example: Amelia is planning on giving her home a refresh by taking on a small reno herself. As she’ll be tackling the jobs on the weekend, she estimates that the reno should take roughly six months. Since she doesn’t have a set budget, she decides that a credit card is her best borrowing match, as she can pay as she goes.

Mozo tip: While you don’t need to pay your credit card balance in full each month with a 0% interest-free offer, make sure you at least pay the minimum repayment amount, and before the intro rate period ends, pay off the balance in full.

Freebies:

If you’re after a little more bang for your buck, then a rewards credit card might tempt you to choose a credit card over a loan. There are loads of credit cards out there that are linked to rewards programs offering generous point schemes or even cash-back offers.

• Example: John regularly travels for work to meet clients and needs credit to pay for his upcoming trip. With a platinum credit card, he’ll rack up points that he can use to reduce the cost of his upcoming flights.

Insurance:

Many premium and rewards credit cards come with various shopping perks, such as extended warranties and purchase protection. Some credit card providers even offer free travel insurance options, such as interstate flight insurance and transit accident insurance coverage.

Example: Kyle flew from Melbourne to Brisbane to visit his mum. Unfortunately, his flight was cancelled and rescheduled. Then, upon arrival in Brisbane, he learned that the airline lost his luggage. Luckily, since he booked his travel on his credit card, he could file an interstate flight insurance claim and was reimbursed for his losses.

The data above is correct as of 22 January 2024

** Based on the Mozo database

Of course, Aussies don’t just use credit cards and personal loans for making purchases – they’re also commonly used to ditch debt. If this is you, you’ll need to decide whether a debt consolidation loan or a balance transfer card will be your weapon of choice.

Debt consolidation loans:

Here are some of the pros and cons of debt consolidation loans:

0% balance transfer cards

Check out a few of the pros and cons of debt consolidation loans:

The number one thing to consider when choosing between a personal loan and a credit card is how you will use the product.

For instance, if you know exactly how much you want to borrow and want repayment consistency, then a personal loan could be your borrowing match. Alternatively, if you prefer to pay as you go and know you won’t be tempted to spend more than you need to, then a credit card might be a better option.

The same applies to ditching debt, as a personal loan may be a good option if you’re on a strict budget – whereas a balance transfer might save you big bucks in interest if you know you can diligently pay the debt back within the interest-free period.

Whichever option you choose, use due diligence and compare personal loan or credit card products to help you find the right deal for you.