Personal loan vs credit card: Which is better for you?

Introduction

Borrowing money has become a normal part of modern financial life. Whether it is to manage everyday expenses, handle an unexpected short-term need, or achieve a major long-term goal, having access to credit can provide valuable flexibility.

Among the most common ways to borrow are personal loans and credit cards, each offering different features designed to meet specific financial needs. Because they serve different purposes, choosing the right borrowing option is important to ensure that the solution you select matches your financial situation, repayment ability, and long-term goals.

In this blog post, we will explain how personal loans and credit cards work and highlight the different situations where each option may be more suitable. If you are planning to borrow money and are unsure whether a personal loan or a credit card is the better choice, this guide will help you understand the differences clearly and choose the option that best fits your needs.

What is a personal loan and how does it work?

A personal loan is a set amount of money you borrow and repay in fixed instalments over a set period, usually between 1 and 7 years. Each repayment covers both the principal and the interest charged.

Personal loans are commonly used for major expenses like home renovations, travel, or consolidating debt. According to the Australian Bureau of Statistics (ABS), Australians committed to about $5.2 billion in new personal loans during the December 2024 quarter.

Types of personal loans

Personal loans are typically classified into two main types: secured and unsecured loans. Each serves different financial needs and comes with its own advantages and considerations.

The following overview outlines the key differences to help you determine which option may best suit your situation.

Secured personal loan:

A secured personal loan is backed by an asset, such as a vehicle, real estate, or a term deposit. This asset serves as collateral, giving the lender a legal right to reclaim it if you default on the loan. Because the lender bears less risk, secured loans generally offer:

• Lower interest rates
• Larger loan amounts
• Longer loan terms

However, the process of securing the loan can be more complex and may involve:

• Restrictions on how funds are used (e.g., specific car models for car loans)
• Valuations and proof of ownership for the asset
• Risk of losing the asset in case of non-repayment

Unsecured personal loan:

An unsecured personal loan, on the other hand, does not require any collateral. Approval is based primarily on your creditworthiness, including your credit score, income, and financial history. These loans are quicker to access and more flexible in how funds can be used, but they typically come with:

• Higher interest rates
• Lower borrowing limits
• Shorter repayment terms

Because the lender cannot claim an asset if the borrower defaults, unsecured loans are seen as riskier.

Important terms you should know when taking a personal loan

There’s more to a personal loan than just the amount you borrow. Here, we’ve given an overview of repayments, interest rates, and common fees so you know exactly what to expect before signing on the dotted line.

Repayments and interest rates:

Personal loans generally come with either a fixed or variable interest rate. A fixed interest rate means your repayments will stay the same for the entire loan term, providing certainty in your budgeting.

A variable interest rate, on the other hand, can move up or down depending on market changes, which could cause your repayments to fluctuate. As of early 2025, the average interest rate for unsecured personal loans in Australia is between 11% and 13% per annum.

Fees and charges:

Most personal loans include some fees that you should be aware of when applying. There is typically a one-off establishment fee, which generally ranges between $150 and $400. In addition to this, there is usually a small monthly account fee of around $10. These fees may either be added to the loan amount or charged separately, depending on the lender’s terms.

What is a credit card, and how does it work?

A credit card is a payment tool that allows you to make purchases or access cash by borrowing money up to a set limit. It works as a substitute for cash or checks and usually provides a revolving line of credit. This means you can borrow, repay, and borrow again as long as you stay within your limit and meet your repayment obligations.

Each month, you must repay at least the minimum amount set out in your cardholder agreement. As you repay the balance, your available credit is restored. Unlike charge cards, which must be paid in full every month, credit cards let you carry a balance if needed.

Physically, a credit card is a plastic or metal card containing your account number, a magnetic stripe, and sometimes a chip or contactless feature for faster transactions. Newer technologies also include biometric cards that use fingerprints or other personal identifiers to authorise payments.

Types of credit cards

There are many types of credit cards available, each designed to suit different needs:

• Standard credit cards are basic cards often targeted at people with limited credit history or lower credit scores. They usually have higher interest rates and lower limits.
• Premium credit cards are designed for customers with higher incomes or better credit scores and often come with benefits like lower rates, higher limits, and rewards.
• Affinity credit cards are offered through partnerships with non-profit groups, alumni associations, or clubs, featuring special branding and member benefits.
• Co-branded credit cards are linked with companies like airlines or retailers, offering perks like discounts, rebates, or loyalty rewards when used with the brand partner.
• Corporate credit cards are issued to employees for business-related expenses like travel and procurement and are often managed under agreements with the employer.
• Cash-secured credit cards require you to provide a cash deposit as collateral, helping individuals with poor or no credit history rebuild their credit.
• Home equity credit cards use your home as security and give you access to a line of credit with competitive interest rates.

Other card options:

Besides general-purpose cards, there are also proprietary (store-only) cards, issued by retailers for use in their stores, and cash access cards, mainly used for taking cash advances. Banks also offer debit cards and prepaid cards, but these are different from credit cards because they don't involve borrowing money.

When should you use a personal loan?

You should consider using a personal loan if you come across the following situations:

You need a large amount of money upfront:

Personal loans allow you to borrow larger amounts than most credit cards, making them ideal for big expenses like weddings, home renovations, or buying a car. Some lenders offer loans of up to $100,000.

You want to manage your spending better:

Personal loans provide a set loan amount without ongoing access to more credit. This can help you control spending and avoid accumulating additional debt.

You want a lower interest rate:

Compared to credit cards, personal loans often have lower interest rates. Borrowers with strong credit can access rates averaging around 18.68 percent, compared to about 24.72 percent for new credit card offers.

You want to avoid high charges and fee:

Credit cards often come with multiple fees, like annual fees, cash advance fees, and late payment fees, with interest accruing on them. Personal loans usually have fewer charges, mainly fixed interest, though some lenders may apply application, late, or early closure fees.

You want to consolidate debt:

Personal loans can combine multiple high-interest debts into one fixed repayment, often at a lower interest rate than credit cards.

When should you use a credit card?

You should consider using a credit card if you come across the following situations:

You prefer safer online purchases:

Credit cards offer stronger fraud protection compared to debit cards, making them safer for online shopping.

You are eligible for rewards and special offers:

Many credit cards provide cash back, loyalty points, travel rewards, and limited-time 0 percent interest promotions that can turn everyday spending into savings.

You need a short-term loan without interest:

Credit cards give you an interest-free period on purchases if you can pay the balance in full before the due date​.

You want emergency access to funds:

A credit card provides quick access to credit in case of unexpected expenses like urgent repairs or medical bills​.

You prefer flexible repayment options:

While it is best to pay the full balance, credit cards allow you to pay a minimum amount if needed and manage your cash flow​.

You want additional purchase protection:

Many credit cards offer benefits like extended warranties, purchase protection, and price protection for eligible purchases​.

You want to easily separate personal and business expenses:

Using a credit card can help you easily track and manage business or personal expenses separately for budgeting and tax purposes​.

Final thoughts

We hope this blog post helped you better understand the practical differences between personal loans and credit cards, and gave you clarity on when each option might suit your needs. Making the right choice can protect your cash flow, reduce unnecessary costs, and support your financial goals in the long run.

But choosing the best option isn’t always straightforward. That’s where the right advice makes all the difference. At ZedPlus, we take a personalised, strategic approach to help you make informed borrowing decisions. We assess your full financial picture, highlight any hidden costs or tax considerations, and recommend the most suitable lending solution based on your specific goals. Get in touch with ZedPlus today.