PERSONAL LOANS

What do credit cards and personal loans have in common? Obviously, in the famous words of ’70s funk group the O’Jays, ‘Money, money, money, money! Money!’ (That’ll be in your head all day now. You’re welcome.) Both credit cards and personal loans give you access to extra cash when you need it. They also both come with fees and interest that will have to be paid back in addition to the lump sum you borrow (bummer, we know).

After that, though, there are some important differences between the two. Which route will give you a lower interest rate and the most attractive terms to pay back the money? Which would look better or worse on your credit record? Here are the facts.

Getting up close with your personal loan

With a personal loan, lenders will offer you tailor-made terms covering: the sum you want to borrow, the fees, the interest rate you’ll be paying, your repayment amount per month, and the time frame in which you have to pay back the money.

Psst! You can learn how to qualify and apply for a personal loan here.

Personal loans are generally better for large, planned purchases – like revamping your bathroom or buying a second-hand car. They can also put on tights and a cape and come to the rescue in an emergency, like when your fridge, oven and washing machine all decide to conk out at the same time. Personal loans can offer lower interest rates than the average credit card, and are ‘safer’ in that you get one lump sum deposited into your bank account rather than revolving credit (more on that later).

If you’ve been managing your money like a boss in recent years, you could get access to a personalised interest rate up to a maximum of the repo rate (which is currently 6.25%) + 21%. Personal loans can also look good on your credit record if you stick to the terms and pay your instalments on time.

The nitty-gritty on credit cards

Credit cards are more flexible than personal loans but, unless you’re a professional contortionist, too much flexibility can be risky.

In a nutshell, credit cards allow you to spend money you don’t actually have up to a certain limit, which could range from a few hundred to many thousands of rands. When you spend this virtual money, there’ll be a minimum amount that you need to repay (which could be as little as 3% of the total) by a certain date. Some credit card accounts will offer you a short, interest-free grace period, giving you the chance to get your balance back to R0 before they charge you interest. Even if you’re not zeroing your balance each month, you can still pay back more than the monthly minimum repayment in order to get back to zero faster and therefore pay less interest (which is calculated monthly).

Just like personal loan interest rates, credit card interest rates are personalised. The bank does some mathematical gymnastics, throws the bones, has a chat with planet Mercury, and then tells you what your individual rate will be. This could range from less than 10% to a maximum of the repo rate + 14% (right now that would be 20.25%).

Remember that the costs don’t stop at the money you’ve borrowed and the interest you owe. There will also be initiation charges and monthly service fees on your credit card. This useful article gives you a breakdown of those fees for some of SA’s most popular credit cards.

Credit cards are convenient because you can use them for a rainy day – or a sunny day in Mauritius. They’re especially handy for booking flights, as you often get free travel insurance, and, because the funds are digital, they can be swiped overseas in different currencies, giving you peace of mind for emergencies (yes, we know sometimes the term ‘emergency’ can extend to that pair of hand-made leather sandals you spotted in a market in Marrakech and now simply cannot live without).

Most credit cards also come with nifty rewards programmes and cashbacks, which means you’re earning extra cashola whenever you use them for day-to-day purchases like groceries and fuel.

Okay, so perks abound. But here’s the kicker with credit cards, and the reason so many people get trapped into unmanageable credit card debt: as long as you pay the monthly minimum, you can keep spending up to your maximum limit, basically forever. This is called revolving credit, and like the doors at a fancy hotel, it can trap you inside if you’re not careful. A lot of maxed-out credit card debt isn’t a good look for your credit record, because it suggests a lack of discipline and uncontrolled spending. If you opt to have a credit card, work the system for maximum rewards but always pay back as much as you can, as soon as you can, to nip your interest in the bud.

When should you use a credit card vs a personal loan?

To recap, credit cards are good for:

• Making smaller, day-to-day purchases
• Borrowing and paying back smaller amounts faster
• Working the loyalty programmes to take advantage of perks and rewards.

Personal loans are good for:

Think a personal loan is for you? Use our personal loan calculator to see how much you qualify for. Compare multiple quotes now without making a dent on your credit score – for free, with no obligation and no risk.