Should you get a credit card or personal loan? Both options are easy ways for someone with a good credit history to get access to smaller amounts of money relatively quickly. You usually won’t be buying a house or a car with these financial tools, as they are limited to smaller amounts. But they are perfect for financing holidays, weddings, non-essential operations and plenty more one-offs beyond what most people have in their bank account.

But can they be used interchangeably? No. There are times were taking out a personal loan is a far better option than starting a new credit card or putting the expense on your existing card or cards.

So how can you be certain that a personal loan is the right option for you? It depends on your needs and ability to manage debt. So read on to become familiar with some of the major considerations when deciding between a personal loan and a credit card.

1. The size of the purchase

The simplest metric of all that helps in deciding between a credit card or a personal loan is the size of the purchase. Credit cards are ideal for small purchases, such as everyday groceries when you’re a day or two away from payday, booking a weekend away, or even eating at a good restaurant for a night out. Credit cards are ideal for amounts of up to around $5,000 as this is generally the credit limit on most Australian credit cards. And because the card will be sitting there in your wallet, it can be pulled out immediately for an easy transaction.

But when you require an amount in excess of $5,000, such as to finance a holiday overseas, or to buy and install an entertainment unit that you’ve always been dreaming of owning, a personal loan can make far more sense. As we’ll see below, personal loans hold numerous advantages in how they’re repaid when compared to credit cards. And because a purchase that large is always going to be a carefully considered one, the additional wait time and processes involved in getting a personal loan approved won’t be an issue. This is particularly advantageous as it gives you the opportunity to pull out of the application if you change your mind for any reason.

2. Interest rates

You’ll often find better interest rates with personal loans than credit cards. In fact, when interest rates are lower – as is the case now – a personal loan can be a real advantage because you can lock in a fixed rate loan. That way, if interest rates should rise again, the cost of your loan repayments won’t be affected. A person with a credit card, however, will find that the interest accrued on their card will fluctuate with changes in interest rates.

Additionally, with secured personal loans, you can reduce the interest rate further. A secured loan is where you pledge an asset that you own, usually car or property, against the value of the loan. Lenders provide lower interest rates to these loans because they know if there is non-payment for some reason, the asset can be claimed to cover the losses. There’s no such option for a credit card.

3. Repayments

Personal loans are far more structured than using credit cards. Once you take the loan out, you’ll have a period of time, generally between one and seven years, to pay it down. Then, each month, a set amount of money will be taken out of your savings account (or paid in another way) that is both painless and seamless. At the same time, you won’t be able to “add” to the debt.

For people who struggle with controlling their finances, a credit card can be a nightmare. It can feel like every time they do start to reduce their debts, temptation overcomes them, and they use the card again to make a purchase.

4. Additional fees

A personal loan will have an up-front application fee, which is generally added to the loan amount. There will often be a monthly fee involved, too. A personal loan also includes all the fees in the ongoing balance, and as the payment will generally be withdrawn from your savings account each month, there’s less of a risk of you forgetting to pay it and drawing a late fee. Additionally, it’s impossible to overspend on a personal loan, meaning that as long as you have the money in the account to cover the monthly withdrawal, you’re at far less of a risk of “bill shock” from a personal loan.

A credit card will generally have an annual fee for keeping the card active, and over the long-term, this cost can really build up. Additionally, credit card companies tend to be very ruthless and will charge hefty late or overdraw fees. Furthermore, while you can use the credit card for cash, the rate of interest on cash is high.

Which option is right for me?

Ultimately, that depends on what you need the money for. Credit cards have ongoing flexibility, while personal loans are a stable solution to a single, big, up-front payment. With credit cards, you pay for the flexibility, but with personal loans, there’s no capacity to continue to use them following the initial spend.

If you’re still in doubt, feel free to discuss the relative merits of both sources of credit with us at SRG Finance. Our friendly team of experts are at hand to answer all the questions you might have.