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The Why and Whens of Personal Loans, Overdrafts and Credit Cards

Posted by Lodex on 21 Aug 18

When it comes to credit, there are sooo many options and most of us get confused with what will our situation fit better. 

Thanks to our friends at Gateway Bank, we are sharing a quick guide on Personal Loans, Overdrafts and Credit Cards - the differences, the pros and the cons. Happy reading.

Which one is the best option for you? Personal loans, overdrafts and credit cards might seem similar on the surface, but each have certain features and benefits that make them a better choice depending on your individual circumstances. 

How will you know which is the best option for you? We’ve outlined the main differences here.

  • Personal loan: a personal loan provides a lump sum of money, which is required to be repaid regularly over a set period of time. Interest is charged on the entire amount of the loan. 

 

  • Overdraft: an overdraft is generally attached to an everyday transaction account, and acts like a revolving line of credit. It lets you access additional funds when your account balance reaches zero. You are approved for a certain limit and can draw as much as you need up to that limit. You are only charged interest if you use funds from your overdraft.

 

  • Credit Card: a credit card is also a revolving line of credit. Like an overdraft you are approved for a certain limit and can spend up to that limit in any given month. You are required to pay a minimum repayment every month. If you don’t pay the full outstanding balance in each month, you will accrue interest on the outstanding balance. 

 

Personal Loan

Suitable for: 

  • One-off large purchases such as renovations, unexpected expenses e.g. medical costs, etc.
  • Debt consolidation

Pros

Cons

  • Cheaper interest rate than a credit card
  • Formal loan application can be time consuming 
  • Regular principal and interest repayment schedule means the debt will be paid off
  • No interest-free days that are offered through many credit cards
  • Unlike a revolving line of credit, you don’t have access to continuous funds which means you aren’t encouraged to overspend
  • Will have associated fees e.g. set-up fees

 

 
  • Debt is spread over a longer time period, which means generally you will carry the debt for more than a year

 

Overdraft

Suitable for:

  • Small purchases e.g. less than $2,000
  • Short term debts
  • Unexpected costs

Pros

Cons

  • Cheaper interest rate than a credit card
  • Easy access to funds makes it easier to overspend, compared to a personal loan
  • Allows you to better manage cashflow, in case unexpected costs arise or expected income is delayed
  • Higher interest rate than a personal loan
  • You are only charged interest if you use funds from your overdraft
  • Formal loan application can be time consuming 
 
  • Certain lenders will have no loan establishment fee
  • Sometimes has monthly account fees
 

 

Credit Card

Suitable for:

  • Everyday shopping 
  • Smaller purchases e.g. $5,000 or less

Pros

Cons

  • Generally a quicker loan approval process means you don’t wait as long as you would for a personal loan or overdraft account to be approved
  • Higher interest rates than personal loans or credit cards
  • Can offer interest-free periods
  • Often an annual application fee
  • Usually offers reward programs
  • Easy access to funds can encourage overspending
   
  • Only needing to pay the minimum repayment every month means your debt can linger 

 

We hope this shed some light on the differences. Want to learn more and always stay on top of your finances? Subscribe to Finsights!

Topics: Life Hacks

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