Budgeting

Small personal loans – wiser choice than a credit card

Even the best made plans can come crashing down when life happens, and sometimes there is no other choice than to borrow money to get through the rough spots. But the tool you choose for borrowing money might shape the rest of your financial future, at least in the short-term. A personal loan is typically a better choice than a credit card, especially in an emergency. And here’s why:

1. Fixed interest rates

Loans typically have a fixed interest rate, while credit cards have variable interest rate. What does that mean? That means that when that promotional period for the credit card’s 0% rate ends, you might be stuck with a rate in the double digits. With a personal loan, the interest is typically fixed, meaning the rate will not change. Plus, personal loan rates are usually lower than the credit card ones. This saves you money over the life of the debt, and guarantees fixed, predictable payment amounts.

2. Less temptation to go into more debt

A loan is a fixed amount of money that you borrow from the bank or agency that is scheduled to be repaid in a certain number of years. Once the loan is paid off, there is no more debt. Credit cards are a revolving debt, meaning you can borrow again and again, effectively staying in debt perpetually. Before you know it, items like a cup of coffee or petrol for the car are getting charged to the card, and the balance keeps growing. A personal loan will get you out of the emergency situation and help you stay out of debt, since you can not borrow money repeatedly.

3. A better credit rating

There are three credit reporting agencies in Australia, each issuing a credit score that can mean lots of things – easier approval for loans, better jobs (some employers check credit reports and scores), and even a better chance to get approved as a renter. One of the factors that affect the score is credit mix, meaning the types of credit products you have. Although credit reporting agencies do not share their exact algorithms for calculating scores, it is generally believed that having instalment debt (loans) is better than having revolving debt (credit cards), as that marks you as a less-risky borrower. Think of an example: a person who owes $2,000 on a loan, and a person who owes $2,000 on a credit card with a $10,000 limit. The second person could charge another $8,000 on their card, which makes them a riskier borrower than the first person.

When life gets in the way and you need quick access to emergency cash, go with a personal loan over a credit card for the reasons stated above. Feel free to contact us for more information.