Living debt free is extremely challenging for most South Africans and credits cards and personal loans are extremely useful. They are, however, very different and it is important to understand the difference. This way you will know the best time to use them and these and make better-informed decisions. This will save you money.

Let’s look at the differences between the two:

Personal loans

Personal loans can range from as little as R250 up to R230 000 and are normally payable over a period of up to 7 years. Unsecured personal loans are seen as a higher risk than loans secured by a vehicle or a house that can be repossessed in order to cover a large portion of the loan. Because of this, personal loans have a higher interest rate than secured loans such as a bond.

Your credit profile will be a large factor in the amount of interest you are charged. A client with a good credit history and a good score can get a personal loan at or near to the prime rate. Those with a less favorable score can pay considerably more.

A microloan is a form of a short-term unsecured personal loan of less than R 8 000 is payable over a maximum of six months. These loans normally have much higher interest rates. It is important to shop around when looking for a personal loan. Look not only at the interest rates but also all other additional charges that might be attached to the loan.

It is obviously in your interest to maintain a good credit history as this will improve your chances of getting a better interest rate. Affordability is another important factor as you need to have sufficient disposable income in order to repay the loan.

Credit cards

Credit cards are extremely convenient and give you instant access to credit when necessary. They also offer flexible payment options depending on the amount you spend. Although this has advantages, it is of the main differences and potential drawbacks of credit cards. A personal loan ensures that you repay the debt within a given time.

Using credit cards indiscriminately can soon trap you into a cycle of payments that decrease the outstanding amount very slowly. One must use them with caution and think about the payments you are making. Because your minimum repayments reduce as the amount owing reduces, it could take a lot longer to repay an amount with a credit card. Again, it is important to look at your interest rate, other charges and repayment period.

Credit cards will generally charge the same amount as a personal loan so provided you use them and repay them wisely they should not have to cost you any more.

Final thoughts

There are pros and cons to both options and a lot will depend on your personal circumstances. Be informed, look at the costs and choose wisely.