Nicolette Dirk, finance writer, Justmoney.co.za
What is the most cost effective way to get credit? Is it better to use your credit card than take out a personal loan? We chatted to the experts to find out the financial ramifications of these two types of credit vehicles and which one is the cheaper option.
Should I get a personal loan or use a credit card?
According to Graeme Holmes, head of consumer cards at Nedbank, customers need to understand the different stages in their lives to make sure they choose the right financial solution to suit their particular circumstances.
“A credit card can be a convenient alternative to carrying cash when are going to the shops, and cost effective, especially if you plan on paying off your full outstanding balance every month. A personal loan is great when you have a specific item or goal in mind, e.g. school fees, that holiday to the coast while knowing exactly how much you need to pay back each month. This is also irrespective of changes to the prime lending rate, inflation, the fuel price, etc,” says Holmes.
Johan Maree CEO of FNB Credit Cards said it also depends on the type of purchase required. A personal loan is a better option for once off larger purchases, or where you want to settle a number of smaller debts and pay only one installment. A credit card on the other hand works better for smaller more frequent retail purchases.
Pieter du Toit, CEO FNB Loans, says: “Many smaller debts attract fees and charges and consolidating all these into one loan will reduce the cost of your debt and help you to repay the loan sooner.”
What is the difference in repayment structure?
A personal loan only provides you with credit and generally has a fixed repayment term. Standard Bank says that a credit card is a transactional and credit solution combined.
“You can choose either a fixed, full or minimum repayment amount depending on your needs or what you would like the card for. A credit card is a revolving facility meaning that whatever has been paid back on the outstanding capital balance can be used again. We see many customers using a credit card as a transactional product only,” says Standard Bank.
The other added benefit of using a credit card is that you generally get 55 days interest free period. Thereafter interest kicks in. With a loan, however, you pay interest from day one.
But you have to weigh up the reasons for getting a personal loan carefully because they are generally more expensive than credit cards. In terms of the National Credit Act the maximum interest rate that can be charged on a credit card is of 22.1% while the maximum on a loan is 32.1%. However, both products have interest rates that are calculated based on your own credit profile. Depending on how well you have conducted your financial affairs in the past you could qualify for a loan that charges interest below the average.
What are the pitfalls of borrowing credit?
Maree says that if a credit card is not used responsibly and the minimum monthly repayments are not met, it could negatively affect your credit rating.
You should also be cautious with high risk personal loans that can charge a higher interest rate. Standard Bank says you should ensure that you understand all the costs associated with the loan before taking it up.
“Unless you have a good credit rating you will not qualify for a personal loan based on strict lending criteria that banks apply on credit worthiness,” says Standard Bank.
Du Toit says that you should also keep in mind that any form of debt attracts interest, fees and charges. This is what makes a personal loan more expensive than using your savings.
Regular payments through debit orders
A great way to make sure your payments are made on time is to sign a debit order.
“The amount due is then prioritised and automatically paid. Also set your debit order date to coincide with your salary date to ensure you have enough money in your bank account to honor the payment on the due date,” says Standard Bank.
The settings of debit order repayment values are flexible and can be either a fixed amount, a minimum amount required by the bank or a larger amount.
Do a thorough budget
Maree says consumers need to be responsible and honest about their financial standing and draw up a budget and stick to it. “If your current income can’t support your spending, then your spending behaviour needs to change. You should always make the minimum required payments due,” says Maree.
Standard Bank says it is important to keep the payment aside as this will help to make sure you stay on a positive financial track. Do not use credit to buy things you cannot really afford.
Every little bit counts
A good strategy to adopt is to repay more than you need to into your loan or credit card whenever you can afford to so that you pay off your loan quicker. It also helps to create a buffer so you can cope with increased payments if interest rates should rise, which they could do further into 2014