When we find ourselves in a spot financial difficulty, where do we go to find the best solution? This is a question many of us face at some stage in our lives, and whether it’s looking for a credit card or a loan, there are so many options to compare in the market. It’s very confusing for a consumer to find the best product for your personal needs. This article provides a steer on the key differences between credit cards and loans.
If you are looking for a credit card, make sure you request a ‘key facts’ sheet from each provider, so you compare and contrast their fees, interest rates and features. These should include:
- minimum repayment
- the interest rate that applies to purchases/cash advances/balance transfers (for how long)
- promotional interest rates (if any)
- length of the interest-free period (if any)
- annual and late payment fees (if any).
When paying off your credit card, always try to budget and be disciplined to pay off the full amount owed each month if possible. By doing so, you will avoid additional interest charges and reap the benefits of any interest-free periods. As a result of this, you will pay off your debts faster, although you may only be able to pay off the monthly minimum repayments. Should this be the case, keep a lookout for a card with a lower interest rate and pay off more of the balance when possible. Try to avoid withdrawing cash on your card, as cash advances have no interest-free periods, and the interest rates can be very high. You are also likely to pay a fee when making using an ATM.
If you run up $500 on your credit card with typical terms with minimum repayments of 2.5% of the outstanding amount. You then make the decision to stop using that card, so you can pay off what you owe. Interest is charged at 16% per annum for the date of purchase (unless you pay the full balance off each month), and there are no additional fees on the account. By making only the minimum repayments, you’ll pay about $421 in interest on top of the $500 originally borrowed – or $921 in total which will take you around 5 years to pay off that card. By paying just $37.50 a month, you’ll pay off the balance within 15 months and pay only $46 in interest. That’s a saving of $375.
Should you be considering taking out a loan, always be aware of the following fact checklist:
- total amount to be paid back over the lifetime of the loan
- interest rate
- establishment fees (if any)
- ongoing fees
- what happens if interest rates rise?
- how can I pay off my loan faster?
Lenders should provide a comparison of all repayment options. Depending on the type of loan you choose, repayment options always be presented to the consumer. The comparison rate will include the interest rate or monthly payment amount, plus additional fees and charges. A loan with a lower interest rate but with higher fees and charges could actually be more expensive than an option with a higher interest rate.
As of 1st July 2013, new national interest rate caps were enforced, meaning providers could not charge an interest rate more than 48% in the interest of the loan. Additionally, there is a cap on costs, which depends on the type of credit provider you choose. However, there are some exemptions such as ADI’s (Authorised Deposit-taking Institutions). These providers don’t have caps on interest rates and costs. They fall under some banks, building societies and credit unions. Also not limited to continuing credit contracts like credit cards.
From 1st March 2013, credit contracts where the provider is not an ADI, the credit limit is less than $2,000 and the term is less than 15 days are now forbidden.
SACC – Small amount credit contracts
|not a continuing credit contract |
the credit limit of the contract is $2,000 or less and the minimum term of 16 days and a maximum term of one year.
|20% establishment fee. |
4% monthly fee on the original value of your loan.
if you default, the maximum amount recoverable by the credit provider is 200% of the amount you borrowed.
MACC – Medium amount credit contracts
|not a continuing credit contract |
the credit limit of the contract is between $2,001 and $5,000
a maximum term of two years.
|annual cost rate must not exceed 48% |
you can also be charged an additional $400 establishment fee.
|the credit provider is not an ADI |
the credit limit of the contract is more than $5,000
the term is longer than two years.
|annual cost rate must not exceed 48%|