Small Loans vs. Credit Cards: Which is the Better Option?

Many options are available to Australians when it comes to borrowing a small amount of money.

Two of the most common options are small loans and credit cards. While both can be useful in borrowing small cash, knowing which option is better for your specific needs can be difficult. 

In this article, we’ll take a closer look at small loans and credit cards to help you determine which option is better for you.

What this article covers:

Which Is the Better Option Between Small Cash Loans and Credit Cards?

It depends on the individual’s needs and financial situation. Generally, credit cards are more flexible than small loans in Australia and can be used for various purposes. However, small loans may be a better option for those wanting a fixed repayment plan.

small loans

If you plan to get a micro personal loan or revolving credit of credit card, you should first know its legally imposed fees. 

According to the Australian Securities and Investments Commission (ASIC), the fees charged on loans of $2,000 or less with repayments between 16 days and one year have limits. 

Credit providers can only charge a one-off establishment fee of 20% or less (of the loan amount), a monthly account-keeping fee of 4% or less, and a government fee.

Small Personal Loans vs. Credit Cards

Let’s examine the key factors in deciding which one might fit your needs the most. 

Interest Rates

They typically come with fixed interest rates, even if you’re just borrowing a $50 instant loan. 

Credit cards, however, often come with variable interest rates that can change over time. 

small cash loans

Fees

There are associated fees in getting a loan or credit card aside from their interest rates.

Micro loans may come with origination fees, application fees and prepayment penalties, while credit cards may come with annual fees, balance transfer fees and cash advance fees. 

It’s important to read the terms and conditions and understand the fees associated with each option before deciding, especially if you’re borrowing a larger small amount.

Credit Score

Your credit score can play a significant role in determining if you qualify for a credit card. But it’s not the sole factor lenders look for.

You’ll have a bigger chance of getting approved for loans than credit cards if you have a low credit score; there are small loans for bad credit. However, they may also come with higher interest rates as a result. 

For instance, small-amount loans are suitable if you plan to get $400 from direct lenders but have a bad credit history. But if you have a good credit standing, go for a credit card and borrow the cash through its revolving credit feature.

Just be wary of seeking a micro loan lender with no credit check.

small loan

Repayment Period

Loans typically come with a fixed repayment period, meaning you’ll need to pay back the loan over a set period. So, if you’re borrowing a $500 loan, it can be divided into 6-12 repayment periods.

Credit cards, on the other hand, offer more flexibility regarding repayment. You can choose to pay off your balance in full each month or make minimum payments and carry a balance over time. This flexibility can be helpful but can lead to a debt cycle.

Disbursement Time

Both small loans and credit cards can have same-day disbursement time. Whether you need a small loan fast or a credit card advance immediately, you’ll get it in 10 minutes or so. 

When to Choose Small Money Loans and Credit Cards?

When applying for a small loan, consider the following:

  • If you need a specific amount of money for a particular purpose
  • If you need a fixed interest rate and predictable monthly payments
  • If you have a lower credit score and may not qualify for a credit card
  • If you want to avoid overspending and accumulating credit card debt, especially if you keep borrowing small amounts

Choose a credit card if you:

  • Want flexibility when it comes to repayment and doesn’t want to be locked into a fixed repayment period
  • Have a higher credit and may qualify for a card with lower interest rates and better rewards
  • Want to earn rewards points or cash back on your purchases
  • Need to make smaller purchases regularly (like groceries or gas)

small personal loans

Verdict

You should check your credit score first when deciding between small loans and credit cards. If you have a 700 credit score and above and are planning to borrow small amounts go for credit cards. 

If you have a poor or bad credit score but want a larger amount, get a small loan. You can still avail a good amount of cash, and your credit score won’t be the sole factor for lenders to decide whether or not to loan you the money you need. 

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