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Personal loan vs overdraft vs credit card

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Which one is the best option for you? Personal loans, overdrafts, and credit cards might seem similar on the surface, but each have certain features and benefits

 that make them a better choice depending on your individual circumstances. 

How will you know which is the best option for you? We’ve outlined the main differences here.

Personal loan: a personal loan provides a lump sum of money, which is required to be repaid regularly over a set period of time. Interest is charged on the entire amount of the loan. 

Overdraft: an overdraft is generally attached to an everyday transaction account, and acts like a revolving line of credit. It lets you access additional funds when your account balance reaches zero. You are approved for a certain limit and can draw as much as you need up to that limit. You are only charged interest if you use funds from your overdraft.

Credit Card: a credit card is also a revolving line of credit. Like an overdraft you are approved for a certain limit and can spend up to that limit in any given month. You are required to pay a minimum repayment every month. If you don’t pay the full outstanding balance in each month, you will accrue interest on the outstanding balance. 

Product Pros Cons Suitable for
Personal Loan
  • Cheaper interest rate than a credit card
  • Regular principal and interest repayment schedule means the debt will be paid off
  • Unlike a revolving line of credit, you don’t have access to continuous funds which means you aren’t encouraged to overspend
 
  • Formal loan application can be time consuming 

  • No interest-free days that are offered through many credit cards

  • Will have associated fees e.g. set-up fees

  • Debt is spread over a longer time period, which means generally you will carry the debt for more than a year

 
  • One-off large purchases such as renovations, unexpected expenses e.g. medical costs, etc.
  • Debt consolidation
 
Overdraft
  • Cheaper interest rate than a credit card
  • Allows you to better manage cashflow, in case unexpected costs arise or expected income is delayed
  • You are only charged interest if you use funds from your overdraft
  • Certain lenders will have no loan establishment fee
  • Easy access to funds makes it easier to overspend, compared to a personal loan
  • Higher interest rate than a personal loan
  • Formal loan application can be time consuming 
  • Sometimes has monthly account fees
  • Small purchases e.g. less than $2,000
  • Short term debts
  • Unexpected costs
Credit Card
  • Generally a quicker loan approval process means you don’t wait as long as you would for a personal loan or overdraft account to be approved
  • Can offer interest-free periods
  • Usually offers reward programs
  • Higher interest rates than personal loans or credit cards
  • Often an annual application fee
  • Easy access to funds can encourage overspending
  • Only needing to pay the minimum repayment every month means your debt can linger 
  • Everyday shopping 
  • Smaller purchases e.g. $5,000 or less
 

Gateway offers flexible and competitive personal loans and overdraft facilities. You can find out more here, or speak to one of our Lending Consultants on 1300 302 474, 8am – 6pm AEDT, Monday – Friday. 

 
 

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