Is a personal loan better than a credit card?

Mother and toddler are sitting on a chair while reviewing personal loans and credit cards

It can be challenging when a product or service catches your eye but you don’t have the funds to pay for it. As you start to review your options, you’ve come across personal loans and credit cards as a way to front the expense.

But herein lies the dilemma: choosing between them.

On the one hand, credit cards can be useful as an ongoing line of credit. For example, you might use one to make your weekly grocery shop before pay day or finalise an unexpected bill quickly. However, they usually come with a high-interest rate and inflexible terms which may not be ideal. 

On the other hand, you might have a larger expense or more time up your sleeve. For instance, maybe you’re looking for a lump sum loan to help fund your home renovation. This is where a personal loan can come in handy. Not only do they typically have lower interest rates, but may be more beneficial if you have a single purchase that you’re more confident paying for over time. 

As there are pros and cons to both of these options, let’s have a look at some of them to help you decide what’ll work for you.

Pros and cons of a personal loan

There are some basic advantages to personal loans and they relate to flexibility and knowing what you’ll pay. There are some risks as well, however. 

Pros:

  • Consistent repayments. Lenders will typically offer repayment schedules on a weekly, fortnightly or monthly basis. This means that borrowers can expect to fork over a set amount of money each time repayments are due, making it easier to budget for.
  • Fixed borrowing amount. With a personal loan, you can rest assured that you’ll only be borrowing a certain amount of money (known as the principal amount) and nothing more. Keep in mind that this won’t be the total amount owed as it doesn’t include potential costs associated with the loan, such as fees and interest. 

Cons:

  • Fees. When opting for a personal loan, it’s possible you’ll be subject to a range of fees which you may want to factor into the budget. This might include the application, upfront, ongoing and break fees.
  • Offering up an asset as security. If you’re opting for a secured personal loan, you may have to put up an asset (such as your car) as collateral against the loan. This means that if you default on repayments, lenders may seize your asset.

Pros and cons of a credit card

Credit cards tend to be quick and easy to use. Though they can be mismanaged in the wrong hands. 

Pros:

  • Flexible repayments. Unlike a personal loan, there isn’t a fixed schedule for when you have to make repayments. This means that if you’d like to skip repayments for a month and resume the following month, it’s possible to do so with a credit card (though not recommended). 
  • Interest-free period. Making a purchase and paying it off in full within the interest-free period means you’ll be able to save on interest. 

Cons:

  • Inconsistent repayments. While a credit card does offer flexibility on repayments, bringing your balance over from previous purchases could attract more interest over time.
  • Annual fees. Some providers offer no annual fees with credit cards. Generally speaking though, the annual fees on a credit card could run you up to $900 - maybe more, depending on your provider. 

Choosing between a credit card and personal loan

When it comes to deciding between a credit card and personal loan, it’s best to think about meeting your specific needs.

As it stands, the average variable rate in the Mozo database for a credit card is 17.11% p.a. with $146 being the average annual fees payable. Meanwhile, for an unsecured personal loan, borrowers could be looking at an average variable rate of 10.50% p.a. 

To get an idea of your total amount payable, it’s a good idea to crunch the numbers using a personal loan repayments calculator or a credit card repayments calculator. Check out this example in the table below:

Unsecured personal loan
Credit card
Borrowing amount
$5,000
$5,000
Length of time to pay off debt
3 years
3 years
Interest rate
10.50% p.a.
17.11% p.a.
Monthly repayments
$163
$180
Annual fees
Nil
$146
Total interest payable
$850
$1,996
Total amount payable
$5,850
$6,996

While it’s possible that a credit card could cost you more, there are still banks offering competitive rates out there. So it’s important to do your research. Additionally, it’s worth keeping an eye out for any conditions or fees that could be attached to the loan or card.

Compare personal loan and credit card options

Still deciding between a personal loan or credit card? Have a look at some of the best personal loans and best credit cards that our experts have tracked this month or compare options below.

Personal loan comparison table - last updated 27 May 2024

Search promoted personal loans below or do a full Mozo database search. Advertiser disclosure
  • Mozo Expert Choice Badge
    Unsecured Personal Loan

    Fixed

    interest rate
    comparison rate
    Monthly repayment
    6.75% p.a.to 26.95% p.a.
    6.75% p.a.to 26.95% p.a.based on $30,000
    over 5 years

    Borrow up to $50,000 unsecured. Perfect if you earn more than $22,100 p.a. and have good to excellent credit. Multi-year winner of Mozo’s Experts Choice Unsecured Personal Loan Award, 2021, 2022, 2023 & 2024^'

    Repayment terms from 2 years to 7 years. Representative example: a 5 year $30,000 loan at 6.75% would cost $35,430.23 including fees.

    Compare
    Details
  • Unsecured Personal Loan

    Fixed

    interest rate
    comparison rate
    Monthly repayment
    5.76% p.a.to 24.03% p.a.
    6.55% p.a.to 24.98% p.a.based on $30,000
    over 5 years

    Fast, easy and 100% online, this is a low cost loan with no ongoing fees or extra repayment penalties. It's perfect for savvy borrowers with great credit. If you’re over 18 and earn above $30,000, you could qualify (other eligibility criteria may apply).

    Repayment terms from 3 years to 7 years. Representative example: a 5 year $30,000 loan at 5.76% would cost $35,173.52 including fees.

    Compare
    Details

Credit card comparison table - last updated 27 May 2024

Search promoted credit cards below or do a full Mozo database search. Advertiser disclosure
  • NAB Low Rate Card - Balance Transfer Offer

    Spend with confidence with a low 13.49% p.a. variable purchase rate and 0% p.a. interest on balance transfers for the first 28 months (T&Cs apply). 2% balance transfer fee applies. There’s also up to 55 interest free days on purchases to help you manage your budget better when you make minimum repayments. Minimum credit limit $1,000. No annual fee for the first year (usually $59).

    Purchase rate
    13.49% p.a.
    Balance transfer rate
    0% p.a. for 28 months and then 21.74% p.a. (2.00% balance transfer fee)
    Annual fee
    $59 $0 in the first year
    Rewards program
    -
    Compare
    Details
  • Apply By 28 May 2024
    American Express Qantas Ultimate Card

    Receive 60,000 Bonus Qantas Rewards Points when you apply online by 28 May 2024, are approved, and spend $3,000 on your new Card within the first 3 months. T&Cs apply. Available for New American Express Card Members only.

    Purchase rate
    23.99% p.a.
    Balance transfer rate
    No current offer
    Annual fee
    $450
    Rewards program
    Qantas Frequent Flyer
    Compare
    Details

* WARNING: The Comparison Rate combines the lender's interest rate, fees and charges into a single rate to show the true cost of a personal loan. The comparison rates displayed are calculated based on a loan of $30,000 for a term of 5 years or a loan of $10,000 for a term of 3 years as indicated, based on monthly principal and interest repayments, on a secured basis for secured loans and an unsecured basis for unsecured loans. This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.

^See information about the Mozo Experts Choice Credit Card Awards

Mozo provides general product information. We don't consider your personal objectives, financial situation or needs and we aren't recommending any specific product to you. You should make your own decision after reading the PDS or offer documentation, or seeking independent advice.

While we pride ourselves on covering a wide range of products, we don't cover every product in the market. If you decide to apply for a product through our website, you will be dealing directly with the provider of that product and not with Mozo.