PERSONAL LOANS
Credit card or a private loan: which financing method is right?
If you want to finance a purchase on credit, you have several options to choose from. The two most important are credit cards and personal loans. Comparis explains what the two types of loans are, and when they make sense.
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1. Credit card or personal loan: two common financing solutions
Whether you want to furnish a new apartment, continue vocational training or a buy a new car: there's no denying that taking out a loan to make your dreams come true has it's appeal. The most common forms of credit are personal loans and credit cards.
2. Credit card companies often offer payment in instalments
When it comes to credit cards, most people first think of it as a practical means of payment at the supermarket. What you might not know is that many credit card companies often offer a credit option. This allows customers to pay off an open balance in several instalments. Interest is also calculated in this case.
To activate this partial payment option, you must submit an application. This will then be checked by the credit card provider. The maximum loan amount is determined by your personal spending limit.
How much will the spending limit be?
Depending on the credit capacity of the holder, the spending limit for standard cards is usually between 2,000 and 5,000 francs, and not more than 15,000 francs.
3. Advantage of the credit card: maximum flexibility
The partial payment option for credit cards offers enormous flexibility. Once it's been activated, you can access funds immediately and at any time, and you don't have to wait for the funds to be transferred to your account.
In addition, you can largely decide for yourself when and in what instalments you will settle the outstanding balance. Only a low monthly minimum payment is mandatory. It is usually 5% of the invoice amount, with a minimum of 50 to 100 francs.
As long as you do not exceed your personal card limit, you can in principle delay the repayment of your debts for as long as you want. The partial payment option therefore requires a high degree of discipline and personal responsibility. If several cards are used at once, you can quickly lose control of your situation.
4. Personal loans are also suitable for larger sums
With a personal loan you can finance significantly more expensive purchases than with a credit card. Loans can be used for any private purpose and are possible with most providers from 1,000 francs. Loan of up to 80,000 francs are subject to the Consumer Credit Act (KKG/LCC). A credit capacity check is mandated by law for consumer loans. Individual credit institutions offer loans of up to 250,000 francs and, in exceptional cases, even more.
Regardless of the amount, each lender will perform a credit check. This is used to assess whether and under what conditions an applicant receives a loan. The applicant's financial situation, payment history and various other socio-demographic and risk factors are closely examined. If approved, the borrower will receive the contract to sign. Consumer loans are then subject to a 14-day right of withdrawal.
5. More certainty with personal loans
Unlike a credit card, repayment of a personal loan is clearly regulated from the start. As a borrower, you pay the bank a certain monthly instalment which includes interest costs and amortization (i.e. repayment of the loan itself). At the end of the contractual term, which is between six months and ten years, you have paid off your entire loan, including interest.
Thanks to the rates, which are fixed from the outset and remain the same on a monthly basis, you are guaranteed maximum reliability when it comes to planning your finances. You always know when to expect which expenses. If your personal finances are better than expected, you can repay the outstanding loan amount in full or in part in advance at any time.
6. Personal loans are usually cheaper
For personal loans, the interest rate is between 4.5% and the legal maximum of 11%. The exact amount of the interest rate depends on various factors: for example, the creditworthiness of the borrower, the amount and the term. Whether or not someone owns a home often has an influence.
Lenders must show all additional fees incurred in the loan in what is known as the effective annual interest rate. This does not apply to occasional administration fees, for example for address enquiries or payment reminders. This ensures particularly high cost transparency – a significant advantage when planning a budget.
In contrast, credit card interest rates are usually at or just below the maximum allowable 14%, although this interest rate must also include all administrative costs for the granting of the credit option. However, credit cards quickly incur a number of additional fees such as annual, reminder, invoicing, cash withdrawal or foreign transaction fees. The complex pricing structures of credit card offers lead to a lack of transparency and make it more difficult to compare deals.
7. The repayment term is crucial
Which type of loan is most suitable depends in particular on the personal situation and individual needs. However, due to higher costs and the greater risk of finances getting out of hand, credit cards are generally more useful for amounts that can be paid off within a very short period of time, or that are fully charged to the account on a monthly basis. They are particularly practical for spontaneous purchases, online orders or payments abroad.
However, if there are larger amounts that need to be repaid over a longer period of time, a personal loan is usually the better option. It tends to be cheaper, and is also easier to plan. Personal loans are therefore primarily suitable for the purchase of long-term products, financing education or training, or to replace an existing loan. It may also be worth transferring high credit card debt to a personal loan in order to reduce the interest burden.
Regardless of which type of loan you are considering, you should always first check carefully whether a purchase really fits into your budget. In addition, it is not advisable to finance expensive but short-term consumer goods or expenses such as travel and weddings on credit. It's not worth the long repayment term.
This article was first published on 11.02.2018
