Taking Control / September 2021

Credit Cards Vs Personal Loans: How They Compare

Person checking income statement for personal loan and credit card expense

Personal loans and credit cards differentiate in that a personal loan gives you a lump sum that you can pay back over time, whereas a credit card places a limit on how much you can spend. Each method has its advantages in different circumstances.

With personal loans, a fixed sum of money is paid back in instalments over a period of time, and it is typically used for larger purchases.

A credit card, meanwhile, allows a holder to access funds up to a limit and is usually used for daily expenses and covering costs within a weekly/monthly budget. Personal loans have greater variety in type and process times, from fast loan approval to extensive debt consolidation negotiations.

Below, we’ll take a closer look at the financial situations ideally suited for these two credit options.

How Credit Cards & Personal Loans Work

Personal loans are best used for paying off large debts and are typically one-off unsecured loans received as a lump sum. Lenders typically transfer funds directly to a bank account with few or no conditions on what the applicant can do with the money. One major benefit of a lump sum is that it prevents you from overspending, so you can't spend above the allocated amount of money.

Credit cards make sense for paying off short-term or daily debts, allocating daily/weekly sums that you can borrow from repeatedly as long as you don't exceed the credit limit set by your lender. While credit cards can comprehensively cover a daily budget, a holder has to refrain from falling into the temptation of overspending.

How They’re Used

Personal loans are typically used for large purchases such as buying a new car. Credit cards on the other hand are more practical for covering the costs of daily shopping and monthly utility bills. Most credit card issuers won't charge fees when you purchase goods or services, although you are usually charged a modest fee every time you withdraw cash using a credit card.

Re-Payment Times

Personal loans are typically paid off by fixed, small, weekly/monthly payments until you've paid off your debt. The repayment could be as long as a few years. This is a practical repayment method for the average worker who is paid by the week, although interest rates incur greater costs over time. The basic requirement of simply covering small repayments per week alleviates stress as you don't have to worry about the burden of paying large sums of money.

In contrast to personal loans, credit card payments can be continually made until all debts are paid off. The all-too-common problem faced by credit card repayments is that there is no mechanism to prevent you from incurring greater debt.

Thinking of Getting a Personal Loan?

At MoneyShop, we offer a variety of online loans that anyone in New Zealand can apply for. These include car loans, emergency loans, wedding loans, holiday loans, debt consolidation loans, and unsecured loans.

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