Personal loans vs. credit cards

Choosing between a credit card and personal loan

Upcoming travel, car upgrade, Christmas festivities or home renovations on the horizon? If you need access to money to cover costs like these, you might be considering a personal loan or credit card. Choosing between the two can be tricky. We’ll explain the differences and why one may be a more suitable borrowing option for you.

The biggest difference between a personal loan and a credit card is that with a personal loan you’re given a lump sum upfront, whereas a credit card you’re given a limit that you can spend up to. Both have their advantages and disadvantages. Read on to see which one best suits you.

What is a personal loan and how do they work?

A personal loan is a fixed amount of finance that you pay back in instalments over a period (usually between one and seven years). This amount consists of principal and interest. Generally, they’re used for larger purchases. Broadly, there are two types of personal loans – secured and unsecured.

Set borrowing amount

When you take out a personal loan, you’ll be approved to borrow a set amount of money. Unlike a credit card, which is a revolving line of credit, you won’t be able to spend more than the amount you’ve been approved for.

Example:

Let’s say you’ve been quoted a fixed price for a bathroom renovation that you need to pay as a lump sum. As you know exactly how much money you’ll need, and it’s more than your credit card limit, a personal loan could work well.

Repayments and interest rates

Personal loans typically have a lower interest rate than credit cards. If you’re looking to take out a personal loan, then you’ll need decide whether you want a loan with a variable or fixed interest rate.

Find out what your repayments could look like with our unsecured personal loan repayment calculator.

Fees and charges

A personal loan will generally have an establishment fee, which is a one-off fee you pay when you take out the loan and a small monthly fee.

We’ve created a step-by-step guide covering eligibility, assessment, and everything you need to know before applying for a personal loan.

What is a credit card and how do they work?

A credit card provides access to funds up to a certain limit. They’re useful for daily expenses, monthly bills or smaller purchases that you’ll be able to pay off each month. They’re also a type of unsecured lending. 

Managing your credit limit

A minimum credit card limit starts from as low as $1,000. Unlike a personal loan where you’ve borrowed a fixed amount upfront and that’s all you can spend, you can continue to spend with credit cards up to your available balance. With our budget planner we'll help you do the numbers so you can budget your income successfully.

Repayments and interest rates

As a rule, credit cards carry a higher interest rate than personal loans. You’ll need to make a minimum payment on a specific date each month, known as the payment due date, which is specified in your credit card statement. Learn more about how credit cards work.

Fees and charges

Aside from interest charged, a credit card typically has an annual or monthly card fee. There are additional costs for withdrawing cash - a cash advance fee and a variable cash advance rate (a higher interest rate for withdrawing cash). Certain cards may also charge an international transaction fee on purchases.

Learn more about credit card fees and charges, and how to avoid credit card fees.

Benefits of paying with a credit card

Aside from helping with short term cash flow issues or managing your monthly household expenses, credit cards have other benefits. 

• Enjoy convenience. Make purchases in-store and online without the need to carry cash. Credit cards provide instant access to funds whenever needed.
• Access rewards and perks. Cards with reward programs reward you with points earned for every dollar spent on your card. When you accrue points, you can redeem them for flights, accommodation, gift cards and more.

Some cards also have complimentary travel insurance, extended warranty insurance and purchase protection insurance. Use our compare tool or selector tool to find more information about our NAB credit cards.

The verdict

If you have good control over your spending and regularly follow a budget, then a credit card may be suitable. But if it’s a big purchase or expense you need to finance, and you're unable to pay the debt off quickly, a personal loan could be worth looking at.

Whether you choose a credit card or personal loan, remember that they're both debts. Before you decide to borrow money, think about whether you really need to make the purchase and if you need to make it now. If it’s an expense that can wait, take a look at our budget planner to help you make a considered decision. And always check the fees and charges of any loan or credit card you apply for.