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credit card vs personal loan

There are many reasons why you might need extra cash. Perhaps you want to furnish your house, are expecting a child or want to start a business. You might be looking for a way to combine your debt and focus on paying off one big amount instead of many smaller ones. Whatever the reason you need extra cash, you’ll probably be wondering which route to go: personal loan or credit card.
 
Credit cards are a good choice if you are looking for a short-term solution that you’ll pay off as you go. Personal loans are best when you need long-term financial assistance for larger purchases. The right choice for you will also depend on your situation. Let’s take a closer look at each of these options.

Credit cards

There are many benefits to having a credit card. The main advantage is their ability to help people to establish a credit score. But they can also quickly become a financial burden (like any type of credit) if used irresponsibly. Credit cards generally come with high interest rates after the ‘no interest’ window periods, which means they definitely won’t serve your well as a long-term loan.

How do they work?

When you get a credit card, a limited amount of money is made available to you. This amount is based largely on your credit score and how much you earn. When you spend money on your credit card, you will have a due date on the repayments. This doesn’t mean that you have to pay the full amount by this date (though this is best practice); it means that you will need to pay a minimum monthly payment on your debt. Do your best to pay off your debt in full every month. By sticking to only the minimum payments, you risk putting yourself in a position where you'd struggle to pay your debt off in the long term. Besides that, the additional interest will increase the cost of your credit. 

What are they good for?

While it’s ill-advised to use your credit card constantly because of their ‘revolving debt’ and notoriously high interest rates, they are good for the occasional purchase that you can pay off in full when you are billed. For example, you could use this type of credit for small household items or groceries (as in kettles and bread and milk – not that latest Apple iPad). While you could easily use your debit card for these purchases, certain credit cards have the added benefit of rewards – from cash back to flyer miles and travel insurance, making them an attractive alternative.

Personal loans

Personal loans are given by banks and other financial institutions (avoid loan sharks) and need to be paid off in instalments every month. The amount you are expected to pay will be predetermined and based on the term of your loan (you may have two years to pay it off, for example). Keep in mind that you will pay more on a loan that has a longer term and that the total cost of a loan will be the principal amount plus interest and admin fees.

How they work

Personal loans are relatively easy to obtain. Generally, you can apply in person or online, but the bank will require a number of different documents from you in order to process the application. Typical requirements are payslips, copies of your ID and your personal and employment information. The good news is that they tend to give you feedback on your loan application a few working days after you apply. Interest rates on personal loans are usually lower than on credit cards as they are adapted to the risk posed by the lender (based on the borrower’s credit score).

What are they good for?

While credit cards are generally the best options for short-term loans, personal loans are best for long-term needs (funding a start-up for example – not that dream vacation). Personal loans might be a better option if you aren’t able to meet the full monthly payments on a credit card (because of the more reasonable interest rates on personal loans).

Learn more

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