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Credit card vs. Personal loan: Which one should I get?

Whether your geyser breaks and floods your house or your car breaks down while you are on holiday, unforeseen expenses can result in sleepless nights. Fortunately we have access to financial assistance from credit providers who offer credit in a variety of ways.

Deciding which form of credit to use can be tricky though. Here is a look at the difference between using a credit card and acquiring a personal loan.

A credit cardis a line of credit from which you can borrow money at any time, up to your credit limit (predetermined by your salary income and credit record). Primarily, credit cards are substitutes for cash, but also allow you access to credit (typically interest free for 55 days). Credit card debt is known as revolving debt, this means that if you do not pay the whole amount owed at the end of the month, that you will pay interest on the balance. You will however still be able to make new purchases up to your credit limit amount.

A personal loan is a lump sum in your pocket. A fixed amount which you repay in equal instalments for a predetermined period of time. Unlike a credit card, you cannot access the money you have paid back to the bank or credit provider. The fixed term over which you commit to settle the debt allows you to know exactly when this debt will be fully paid off.

When is it best to use a credit card and when is a personal loan more appropriate?

Here are some general rules:

Reserve the use of your credit card for times when you need immediate access to instant cash. Credit cards are best for making smaller purchases or consolidating smaller debts that you can comfortably repay within a year.

Personal loans are better for larger purchases that may take you more than a year to repay. You can pay off your loan in full at any time to save money on interest.

It’s always better to pay cash, but sometimes credit can be a life saver to help you ride out financial emergencies. If you plan correctly and take your finances seriously, credit can also be a way to meet specific financial and life goals you have set for yourself. Though credit cards are convenient, in some cases a personal loan may be a more sensible and affordable way to pay for a large purchase over time. Credit should always be used with caution as your payment behaviour determines whether or not you will be eligible for future credit and it affects the interest rate at which you will borrow in the future.

Whether you decide to use your credit card or apply for a personal loan, be sure to do your research and use a reputable credit provider that is registered and therefore regulated by the National Credit Regulator (NCR).

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