Credit Card vs Personal Loan

Whether it's a holiday, a new car, or bringing a few debts together, there are a few ways to pay for something big.

Two of the most common are credit cards and personal loans. Both can work well; it really comes down to how you'll use them and how you'll pay them back. Let's take a look at the pros and cons of both, and which is better for your situation.

 

Credit Card vs Personal Loan at a glance

• A credit card lets you spend up to a limit set by your bank. Pay it off in full each month and you won't pay interest.

• A personal loan gives you a lump sum, with a fixed rate, set repayments and a clear end date. With us, that's $500 to $50,000 over 3 months to 7 years.

• Carrying a card balance can get expensive. The average card rate in NZ is close to 20% p.a.

• Can't get a card, or the limit's too low? A personal loan can fill the gap.

• Already carrying card debt? A personal loan can roll it into one fixed repayment.

Credit card or personal loan: the short answer

If you can pay off what you spend in full every month, a credit card is hard to beat, because you won't pay any interest.

If you'd rather spread a bigger purchase over time, a personal loan usually makes more sense: you get a fixed rate, set repayments and a clear finish line. And if you can't get a credit card, or your limit won't cover what you need, a personal loan can fill the gap.

 

How personal loans work

A personal loan can be applied for through a non-bank loan provider just like us!

Once you apply for a loan and are approved, you're given the loan amount as a lump sum in your bank account.

You can then use it to make your purchase, whether that's a new car, a holiday or paying off your bills.

With us, you can borrow from $500 to $50,000 over 3 months to 7 years, with interest rates from 9.95% to 29.95% p.a. depending on your circumstances.

Once you spend the loan amount, that's it! If you need more, you'll either reapply for another loan or, in some cases, you can easily top up your existing loan.

Repayments for your personal loan are made in regular instalments (weekly, fortnightly or monthly) with added interest, but this is a fixed amount each time based on how much you borrowed plus the interest and fees.

The friendly Instant Finance team will work with you when you apply for a loan to make sure you understand what your repayments will be so there are no surprises! It's the responsible thing to do.

 

How credit cards work

In most cases, credit cards are tied to a bank or financial institution where you'll firstly need to open an account.

You'll need to apply for a credit card and set a credit limit, which is the maximum amount of money you can spend on your credit card.

Your credit limit is determined by your provider based on how much money you earn and how likely you are to make the repayments.

Once your credit card is approved, you don't get the money in a lump sum. Instead, you can spend up to this amount on the credit card, with any retailer that will accept the credit card.

Some cards come with an interest-free period on purchases, usually up to 44 or 55 days. Pay your full closing balance by the due date and you won't be charged any interest. If you don't, interest is charged on what's left, and your minimum repayment each month is usually a small percentage of the balance (often 2–5%) or a set dollar amount, whichever is greater.

Some cards also charge an annual fee.

If you don't pay off your full balance each month, your repayments will vary depending on how much you've spent plus the interest, which can make them tricky to plan around.

Once you make a repayment, you can continue to spend up to your credit limit again (this is called revolving credit, more on that below!).

Revolving credit vs fixed credit 

The big difference between the two is how the credit works.

A credit card is a form of revolving credit. Unlike a personal loan, which is a set amount, as you pay down a credit card you can keep making purchases up to your limit. That flexibility is handy, but it also means a balance can hang around for longer than you planned.

A personal loan on the other hand, offers a fixed credit. This means that you decide how much money you need and receive a set amount in cash. Once you spend the cash, you can't continue to spend and increase your debt without reapplying – and in that case, we will review your financial situation to make sure you can afford the repayments and we're lending responsibly.

 

How interest works on each

Credit cards: interest is usually calculated daily on any balance you don't clear by the due date, then added to your balance each month.

If you pay in full within the interest-free period, you pay no interest at all. If you carry a balance, interest keeps adding up until it's cleared. 

The average rate on NZ credit card balances that attract interest is close to 20% p.a.

Personal loans: your interest rate is fixed when you take out the loan, and it's built into your repayment schedule from the start.

You'll know exactly what each repayment is and what the loan will cost you overall, including fees such as a one-off establishment fee and a small fee per repayment.

You'll find all our fees on our rates and fees page.

Credit cards vs personal loans: key differences

 

	Credit Card	Personal Loan
How you get the money	Spend up to your limit, wherever cards are accepted	A lump sum paid into your bank account
How much	Your limit, set by your bank	$500 to $50,000 with us
Interest	Charged on balances not cleared by the due date (average close to 20% p.a.)	A fixed rate (9.95% to 29.95% p.a. with us)
Repayments	Vary month to month. At least the minimum each month	A set amount, weekly, fortnightly or monthly
End Date	None. It's revolving credit	Set from the start (3 months to 7 years)
Fees	Some cards charge an annual fee. Cash advances often carry a fee	Establishment fee and a small fee per repayment
Best for	Everyday spending you clear each month	Bigger purchases you'd rather pay off over time

Pros and cons

	Credit Cards	Personal Loans
Pros	You can have it on hand all the time for different purchases. If you pay off your credit card debt in full every month you will not attract interest. Interest-free period on purchases	Lump sum paid in full that you can use like cash. Fixed repayment amounts so you can manage your cashflow. As long as you make each repayment on time, you'll be debt free by the end of your loan term. You can borrow more than a typical card limit.
Cons	Revolving credit means a balance can carry on for a long time, even as you make repayments. Changing repayments each month can be tricky to keep up with. Cash advances usually attract interest straight away.	You need to reapply (or top up) to access more money. Fees apply, so it's worth looking at the total cost.

Who actually pays interest on their credit card?

Plenty of people use credit cards well.

According to MoneyHub's analysis of Reserve Bank data, just under half of NZ cardholders pay their balance in full and avoid interest altogether.

The rest carry a balance from month to month.

That's where costs can climb, especially if you only pay the minimum.

MoneyHub's example: a $5,000 balance at 19.7% p.a., paying only a 2% minimum, would take 41 years to clear and cost $18,570 in interest.

Your credit card statement includes a warning about this, and Sorted's credit card calculator shows how different repayment amounts change the picture.

A worked example: a $5,000 purchase

Say you're paying for something bigger, like new appliances, a trip away or car repairs, and it comes to $5,000. Here's how it could play out.

On a credit card (at 19.7% p.a., the average rate):

• Paid in full within the interest-free period: no interest at all. If you can do this, a card is the cheapest way to go.

• Paid off at $251.41 a month: cleared in about 25 months, with around $1,103 in interest, as long as nothing new goes on the card.

• Paying only the minimum: around 41 years and $18,570 in interest (MoneyHub's figures).

 

With a personal loan (say you're offered 12.95% p.a. over 24 months):

• $251.41 a month, done in exactly two years, costing $6,033.84 in total, including interest and fees.

So if you can clear a card every month, the card wins.

If you're going to carry the balance, a personal loan at a competitive rate can cost about the same or less, with a fixed end date and repayments that never change.

Rates are personalised and range from 9.95% to 29.95% p.a. Try your own numbers in our loan calculator.

Can't get a credit card, or need more than your limit?

Credit cards usually come through banks, and because they're unsecured, the bank sets your limit based on your income and credit history.

That means some people are declined altogether, and others are approved with a limit that's too low for anything substantial, like a car repair, a new couch or a trip away.

A personal loan works differently.

You apply for the amount you actually need, from $500 to $50,000, and the repayments are worked out to fit your budget. Offering security, like your car, can also strengthen your application.

If you've been declined for a credit card from your bank, or you have a history of bad credit, you might be worried about what your best financial options are. Don't worry – it's not all bad news!

At Instant Finance, while we take your credit score and history into consideration, we give everyone a chance to apply for and be considered for a personal loan.

Our team review each application on a case-by-case basis and see how we can best work with you.

Interested? Apply for a loan now and see how we can help!

Using a credit card as a loan: cash advances

You can use a credit card to withdraw cash, but it's usually an expensive way to borrow.

Cash advances generally don't get an interest-free period, so interest starts from the day you take the money out, often at a higher rate than purchases, and many cards add a cash advance fee too.

If you need cash for something specific, a personal loan pays the money straight into your account, at a fixed rate with set repayments.

Our cash loans page explains how smaller loans work.

 

Which is better for your credit score?

Both can help or hurt, depending on how you manage them.

Making every repayment on time, on either a card or a loan, helps build a good credit history.

Missing payments, or having a debt end up in default, can drag your score down.

Applying for lots of credit in a short space of time can also have an effect.

With a loan, the fixed repayments and end date can make it easier to stay on track. Learn more about how your credit score works.

 

Paying off credit card debt with a personal loan

If you've found yourself with a few credit cards on hand, overdrafts that you just can't pay down, or even buy now pay laters that are adding up, a debt consolidation loan can help you take the pressure off.

Juggling all the different repayments can be tricky, not to mention stressful, so a debt consolidation loan is a way to simplify your finances.

We can help you roll all your debts into one easy-to-manage loan with a fixed interest rate for the life of the loan, so you know exactly how much you'll have to pay each repayment and can even calculate when it will be paid off!

Once your card's paid off, it's worth thinking about lowering your limit, or closing cards you no longer need, so the balance doesn't creep back up.

Our guide to debt consolidation walks through how it works or see our debt consolidation loans.

Also weighing up buy now pay later? Our personal loans vs buy now pay later guide compares the two.

Credit card vs personal loan FAQs

Is it better to take a personal loan or use a credit card?

If you can pay your balance off in full every month, a credit card is usually the cheaper option, because you won't pay interest. If you'd rather spread a bigger purchase over time, a personal loan gives you a fixed rate, set repayments and a clear end date. If you can't get a card, or your limit's too low, a personal loan can cover what you need.

What's easier to get, a personal loan or a credit card?

It depends on your situation. Both involve a credit check and a look at whether you can afford the repayments. Credit cards usually come through banks, which set your limit based on your income and credit history. With a personal loan from Instant Finance, we look at your whole situation, not just your credit score, so a less-than-perfect credit history doesn't automatically rule you out.

How much would a $30,000 personal loan cost a month?

It depends on your interest rate and how long you take to repay it. For example, $30,000 at 19.95% p.a. over 5 years works out to $803.01 a month, or $186.93 a week, including interest and fees. On weekly repayments, that's $48,601.80 in total. Your rate depends on your circumstances. Rates range from 9.95% to 29.95% p.a. Try your own numbers in our loan calculator.

Can I get a personal loan with bad credit?

A less-than-perfect credit history doesn't automatically rule you out. We look at your whole situation, including what you can comfortably afford to repay now, not just your credit score. Once you're approved, the money is in your account within 24 hours.

What hurts your credit score the most?

Missing repayments, especially if a debt ends up in default, is one of the biggest things that can drag your credit score down. Applying for lots of credit in a short space of time can also have an effect. Paying everything on time, every time, is the best way to keep your score healthy.