So what’s the difference?
Personal loans and credit cards are both types of credit provided to borrowers by banks and other lenders. Borrowers can borrow similar amounts using either but personal loans and credit cards have very different features.
Loan duration and repayments
In terms of loan duration (loan term), personal loans are for a set period of time (1 to 7 years), whereas credit cards are a revolving line of credit and don’t come with such. There are definitely strong similarities between personal loans and credit cards. They are both forms of credit and require regular (usually monthly) repayments.
When do I get the money?
Personal loans enable the borrower to drawdown the entire loan amount at the beginning of the loan term. The borrower then makes regular ongoing payments to repay the loan in full.
Do credit cards have terms?
Credit cards do not come with terms. The borrower is offered a credit limit and is required to make ongoing repayments to keep the account in in balance. As credit cards are ‘revolving lines of credit’, borrowers can draw up to the card’s limit and spend however much they like as long as the borrower repays a percentage of whatever they spend each month.
Features and fees
What differs are the product features and fees. Credit cards offer interest-free days, balance transfers and rewards but personal loans generally come with a cheaper interest rate. Personal loans are therefore more suitable for consolidating credit card debt, large purchases (such as a home renovation or a new car) and have a maximum loan term, so the debt is always repaid. Credit cards commonly include annual fees, whereas personal loans usually require establishment and monthly fees (although not all lenders charge these fees).
When is a personal loan best for you?
While a borrower’s most suitable credit option will depend on personal circumstances and preferences, personal loans are often the best option for borrowers seeking large sums of money for specific purposes. Typically these borrowers aren’t able to repay the loan total all at once but will be able to repay the debt gradually over time.
What are the pros and cons of personal loans?
Borrowing via a personal loan can mean committing to repay a debt over the course of 1-7 years. The longer it takes to repay a debt, the lower and more affordable your repayments will be from month to month, but the more interest you may ultimately pay in the long run.
The good news is many personal loans will allow the borrower to make extra repayments so that they can reduce their interest charges and pay off the debt early.
Having a personal loan currently owing in your credit history can also potentially make it more difficult to be approved for additional credit if you find yourself needing it during the term of your personal loan.
If you’re considering a personal loan, you’ve definitely come to the right place. Personifi is the expert when it comes to finding and applying for the right personal loan. Plus, we share any broking commissions we earn with the you. Win-win!