Is it better to get a personal loan or credit card?

Is it better to get a personal loan or a credit card?

Last updated: 10 March 2022

Are you tallying up your finances and it seems that borrowing some money might be the right move for you? But what type of credit should you apply for? The answer to this question is entirely dependent on your situation! There are several factors to consider before you leap in and apply for new credit. Be sure to ask yourself a few key questions: How much do I need to borrow? What can I afford to pay back each period? What is the money for?


When is a credit card better suited than a loan?

Credit cards are a form of ‘revolving’ credit, which means that you can borrow money up to a pre-determined limit, repay some or all of the debt, and then borrow the money again. Credit cards are useful for regular spending and borrowing smaller amounts. They are also a good option if you are unsure how much money you need to borrow, or if you need more flexibility in terms of repaying the debt.

Credit cards can also be useful when you need to pay for things overseas – although you may be charged a currency conversion fee or ATM fees – and are also a good backup in emergencies. Another plus of credit cards is that they can be linked to rewards programs where you can earn points when you spend money and trade them in for cashback, goods or travel. Many cards also offer complimentary insurance covers for your purchases and overseas travel.


When is a personal loan better suited than a credit card?

A personal loan is a more structured form of borrowing where you receive a cash lump sum and then repay it, plus interest, in equal instalments over a set period of time. A personal loan may suit you better if you need to borrow a large amount of money and know that you have the ability to make regular repayments.

Typically, you are able to borrow more money with a loan than you would be able to on a credit card, and potentially at a lower interest rate. Providing you can make the repayments when they are due, your loan will be repaid at the end of the loan term. Loans take some discipline as, unlike with credit cards, you can’t re-borrow the money you’ve repaid.


What about Buy Now, Pay Later?

Buy Now, Pay Later tends to be used for lower value purchases than a credit card or personal loan. Most Buy Now, Pay Later providers do not check your credit score before providing a credit line, or report payment history to credit report bodies (CRBs).  If you have a low credit score and need to fund purchases, this credit option may seem attractive. However, if you are trying to improve your credit score, on time Buy Now, Pay Later repayments will not help in most cases. Whereas positive repayment behaviours on a credit card or personal loan will be reported to CRBs and can help improve your credit score by demonstrating good financial behaviours.


Repayments – what are the differences?

Credit Cards

  • Have to make a minimum repayment each month (usually calculated as a percentage of the outstanding balance)
  • Can usually make extra repayments at any time for no charge
  • If you only repay the minimum each month, it will take a long time and a large amount of interest to clear the debt
  • If you miss a payment you will usually be charged a penalty or late fee – if you let this slip further it can turn into a default – both late payments and defaults can be recorded on your credit file and may affect your credit score


Personal Loans

  • Have set monthly repayments over a period of time (the ‘term’ of the loan) – the longer the term, the more interest you will pay overall
  • You can pay off a loan early but some loans charge you a fee for any early/extra repayments
  • If you miss a payment you will usually be charged a penalty or late fee – if you let this slip further it can turn into a default – both late payments and defaults can be recorded on your credit file and may affect your credit score


Buy Now, Pay Later

  • Have set repayments over a shorter period than credit cards or personal loans, with no interest charged if the payments are made on time
  • There may be additional fees and charges such as account keeping fees or late charges if you miss a payment
  • You can usually pay off your outstanding balance early without any fees but be sure to check with your provider


Short Answer:

Credit cards tend to be better for short-term balances that you are able to pay off each month, while personal loans may be better for medium-to-long term larger debts. Buy Now, Pay Later could also be considered for smaller value purchases with interest free payments over a short period where you are not looking to improve your credit score.


Think you know what type of credit you need? Now it’s just a case of getting a good deal – you can compare hundreds of credit cards and personal loans on our comparison platform now!


Still unsure? Get smarter about credit and read more about Credit Cards and Personal Loans here in our Learning Hub.