If you’re making a purchase that means a lot to you, big or small, there can be a fair bit to think about.
Not least of which is to consider whether a personal loan, a credit card, or good ol’ hard saving is the right move to help you get to that purchase. We know sometimes borrowing money is the only option, so it’s always important to know all of the details before you choose one of these methods.
Fear not! Even though it’s a big decision, if you ask yourself these questions, you’ll have a better idea of what purchase method would suit.
Do you really need to borrow?
The first thing you need to ask yourself is if you really need to borrow, or if you can save for this item down the track. You might find that savings is your best option for making big purchases, because it’s money that you have already, and you don’t need to worry about paying interest for using it.
By making some changes to the way you budget and plan, you might be able to set aside a certain amount of savings each payday and reach your goal the old fashioned way. Check out our guide for using multiple bank accounts to categorise and visualise your budget, which can be a great help.
However, if you’ve looked ahead and don’t think you’ll be able to save up enough in time for when you need to make the purchase, you might consider your borrowing options.
How much do you need to spend?
If you’ve decided that saving might not be the way to go for your purchase, you’ll need to consider whether a personal loan or a credit card would suit your requirements.
Personal loans give you a set lump sum, which you can then pay back over a set period while paying interest. On the other hand, credit cards give you a credit limit to access as needed, with minimum repayments due each month. The interest gets charged on the amount of the credit limit that has been used.
The next thing to ask yourself is how much you’re spending on your purchase, because this will be a key deciding factor in which one you go for.
If you need a one-off payment with a set amount, then a personal loan could be the way to go. However if you think you’ll be paying multiple smaller amounts and aren’t certain about exact costs, (for instance if you need to pay multiple vendors) a credit card might give you more flexibility. Since you only need to pay back what you spend with a credit card, then you might end up with a bit of extra money for your cash flow if the costs of your purchase are surprisingly lower than expected.
Can you afford your repayments?
Unlike savings, you need to factor in the interest when you choose credit card or personal loan. Find out what the interest rate is for both options and if you’re looking at credit card, how quickly you anticipate being able to pay it back, as this will affect how much interest you’re charged. Consider if buying right now is worth the interest you’ll end up paying down the road.
It’s also important to understand if the interest rate is fixed or variable. Fixed means the interest rate stays the same, but variable means it can go higher or lower depending on factors in the market. If you’re after certainty in the amount you’re paying back you might prefer a fixed rate loan, like ING’s personal loans.
Do you know the fees?
The final thing to consider when looking at a credit card or a personal loan is the fees that come up.
Try and find a credit card or personal loan that charges as few fees as possible, so you pay back less in the long run. For instance, ING doesn’t charge annual fees for its standard Orange One, or ongoing fees or early repayment fees for its personal loans. Note that an annual fee is chargeable on its Orange One Platinum.
The key here is to fully read and understand the terms of your card or loan so you know exactly what fees there are.
Once you’ve thought about the method that would suit you, you can look to make your big purchase with much more confidence.
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