If you need to borrow money to cover expenses, you might be wondering whether a credit card or a personal loan is best for you. In this article, we look at the pros and cons of loans vs credit cards. This will help you decide which option makes the most sense for your financial needs and lifestyle. 

So, what is a personal loan?

A personal loan is a lump sum of money that you pay back in instalments over time. 

Repayment terms depend on:

• The loan provider
• How much money you are borrowing and for how long
• The agreed interest rate. 

Personal loans are best for paying off large expenses such as vehicles, weddings and holidays. They are also useful for covering urgent unplanned expenses during times where money is tight. 

Your borrowing limit and interest rate for a personal loan depend on your credit score and whether you have assets to put up as security against your loan. If you do not have many assets (like houses or cars), you can still access an unsecured personal loan.

What is a credit card?

A credit card allows you to access funds up to a ‘credit limit’, via a card. Instead of a lump sum, you have access to a line of ‘revolving credit’. This means you can spend money, repay the balance (within a set amount of time – usually 30 or 60 days), and can then spend those funds again. If you miss your repayments, you will be charged interest. 

The maximum credit limit amount you can access depends on a range of factors, including your credit card provider and your personal credit score. 

Credit cards make sense for paying off short-term or daily expenses. They are useful for allocating daily or weekly sums that you can repeatedly borrow, as long as you don’t exceed the credit limit set by your lender, and you make repayments on time.

Benefits of personal cash loans vs credit cards

One significant benefit of a lump sum loan is that it prevents you from overspending. You can only spend up to the allocated one-off amount. You pay off personal loans in fixed, small, weekly or monthly repayments over a longer period of time. Loans provide peace of mind that you are spending within your limits, and not building up unforeseen debts from impulse buys.

By contrast, once you get a credit card approved, the funds can be drawn at any time, providing immediate, flexible access to credit. This makes credit cards useful for people who have irregular income patterns, or want a back-up for unexpected expenses. 

So, is a loan or a credit card best for me?

Whether to get a credit card or loan comes down to what you are using the money for and what you can afford to pay. 

The easiest option to finance short-term, small expenses may be a credit card, as long as you can pay expenses off within the interest-free period. You need good financial discipline for these payments; because the bill changes depending on what you spend each month, you end up with a big bill if you spend a lot in a short amount of time. 

If you want to finance more significant or longer-term purchases, consolidate your debts, or are unsure if you are able to pay any credit card purchases within the interest-free window, a personal loan will be the best option for you. 

Here’s a breakdown of the differences between credit cards and loans:

Thinking of getting a personal loan?

If you want to apply for a loan, we make the process as easy and stress-free as possible! With competitive rates, streamlined online service, and helpful loan information, the MoneyShop team are known as New Zealand’s most trustworthy loan providers. Contact our friendly team if you want to talk about small or large fast loan options.