Obtaining a personal loan or credit card can be useful when we need money in the short-term, but how do we know which product to apply for?

To reduce the amount of interest and fees charged, the decision to take out a personal loan or credit card should be based on your needs and spending behaviour, while also ensuring you select the product with the lowest combination of interest rates and fees. With a little effort and research, you could save yourself hundreds.

Here we have listed some factors to take into account:

How much you need to borrow and the type of purchases

Due to the more convenient access to funds, a credit card is generally more useful for smaller ‘everyday’ purchases, when you don't have cash available. Credit cards allow you to continually draw on funds, and then make repayments before spending again. Personal loans, however, are more often utilised for larger purchases, such as car or home repairs or a debt consolidation, where a lump sum payment is required.

Borrowing period

Credit cards are often used for short-term periods as they don’t have a set expiration date. You can spend money up to your credit limit and you will only be charged interest on what you have spent. You can also avoid being charged interest altogether, as our Visa Classic and Visa Platinum credit cards both offer up to 55 days interest free on purchases.

Personal loans are more typically acquired for longer periods. Interest rates are generally lower on a personal loan and the scheduled nature of repayments can encourage you to pay the loan off in a timely fashion. Be mindful that sometimes there are fees to pay out the loan early, which is more common if the interest rate is fixed, rather than variable.

Your spending and repayment habits

If you have good control and self-restraint over your spending habits and consistently pay your debts on time, then a credit card may be the best option as you can take advantage of interest free periods. However, if you are prone to impulsive purchases, overspending and not meeting your bill repayments, a personal loan with a lower interest rate and regular scheduled payments could be beneficial.

Once you have a good understanding of your needs and habits, it’s time to weigh these against the features of a personal loan or credit card to ensure you consider all your options. Below is a basic comparison to help you get started:

Feature Personal Loan Credit Card
Interest Rates Generally lower, especially over the long term. Generally higher.
Interest Free Periods No. Yes.
Interest free periods are great if you reliably repay your balance before interest is charged; otherwise you are likely to pay a greater amount in interest due to the higher rate in the long run.
Fees (including application, annual, establishment) Fees will vary between financial institutions so it’s important to consider all of your options. Credit cards often have an annual fee, while some personal loans have an establishment and/or loan service fee.
Repayment Options Repayment schedule.
A less flexible option, however this can help to motivate you to repay the loan in a timely fashion, hence reducing the interest charged.
No repayment schedules. Be mindful that this may lead to an increase in interest paid if the debt is paid over a longer period.
Early Repayment Penalty Some personal loans do have this. No.
Additional features Redraw Incentives/benefit programs.
Some credit cards offer reward points, complimentary overseas travel insurance and other benefits.Be sure to read the terms and conditions to gain a good understanding of each additional benefit.