There are many reasons why you might need extra cash. Perhaps you want to study further, do a home renovation, buy an inverter for when loadshedding hits, or start a small business. Whatever the reason you need extra cash, you’ll probably be wondering which route to go - personal loan or credit card. Credit cards are a good choice if you’re looking for a short-term solution that you’ll pay off as you go. Personal loans are best when you need long-term financial assistance for larger purchases. The right choice for you will also depend on your situation. Let’s take a closer look at each of these options.

Credit Cards

There are many benefits to having a credit card. The main advantage is their ability to help people to establish a credit score. But they can also quickly become a financial burden (like any type of credit) if used irresponsibly. Credit cards generally come with high interest rates after the ‘no interest’ window periods, which means they definitely won’t serve you well as a long-term loan.

How do credit cards work?

When you get a credit card, a limited amount of money is made available to you. This amount is based largely on your credit score and how much you earn. When you spend money on your credit card, you’ll have a due date on the repayments. This doesn’t mean that you have to pay the full amount by this date (though this is best practice); it means that you’ll need to pay a minimum monthly payment on your debt. Do your best to pay off your debt in full every month. By sticking to only the minimum payments, you risk putting yourself in a position where you'd struggle to pay your debt off in the long term. Besides that, the additional interest will increase the cost of your credit.

What are credit cards good for?

Credit cards are useful for purchasing necessary items that are just out of your budget’s reach. A laptop, large kitchen appliance or extensive car repairs. You can also use your credit card for your monthly groceries. In this case it would be a good idea to pay the full amount when it’s due every month. The advantage of using your credit card responsibly is that can help establish a good credit score.

Personal Loans

Personal loans are given by banks and other financial institutions and need to be paid off in instalments every month. The amount you’re expected to pay will be predetermined and based on the term of your loan (you may have two years to pay it off, for example). Keep in mind that you may pay more on a loan that has a longer term and that the total cost of a loan will be the principal amount plus interest and admin fees. Learn more about the cost of credit.

How personal loans work

Personal loans are relatively easy to obtain. Generally, you can apply in person or online, but the bank will require a number of different documents from you in order to process the application. Typical requirements to apply for a personal loan are:

• Payslips and/or bank statements
• a copy of your ID, and
• your personal and employment information.

The good news is that a credit provider will usually give you feedback on your loan application a few working days after you apply. Interest rates on personal loans are sometimes lower than on credit cards as they’re adapted to the risk posed by the lender (based on the borrower’s credit score).

What are personal loans good for?

While credit cards are generally the best options for short-term credit, personal loans are best for longer-term needs such as a second-hand car, home renovations or to start a small business. Personal loans enable you to pay a large amount off over a longer period at a lower monthly instalment. This does however mean you could end up paying more in interest.