Stuck on which to get - Loan vs. Credit Card? Let's find the one!

By Charlotte Yau
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Finding the right way to repay your debts is important. Here's a guide that will clear the confusion.

When you have decided you can afford the repayment of a loan, and it’s the right solution to your situation, there are a few different options you can choose from.
All options have their pros and cons, so it is worthwhile sitting down and looking through the information to find out which is the most cost effective way to go. There are substantial savings to be made by choosing the right method, reducing the overall amount you need to borrow.

Know your needs

Once you’ve decided you need to borrow some money, there are two key questions you should ask yourself:

1. What amount do I need to borrow?

2. What amount can I afford to repay on a monthly basis?


This allows you to figure out what sort of time frame you will be able to repay the borrowings so you won’t be paying extremely high interest rates when you don’t need to. It also allows you to make the right decision about whether to use a credit card or a loan.

When might a credit card be the better option?

For the most part, if you are borrowing less than £5,000 the credit card will be the better option. Most of the major credit cards will have offers whereby you can benefit from an interest free rate for a limited duration. As you can pay 0% on your borrowings, it suited for the shorter term purchases.

If you exceed this short term time period of 0% rates with the credit card, the interest rates will rise significantly. If you went for a personal loan, there would have to be interest paid from the minute you take out the loan, but it would stay consistent throughout the duration of the loan as opposed to the credit card.


Key watch outs: Once the interest free duration ends or you miss out on making a payment, you will be hit with a high interest rate.  Certain credit cards will have a type of loyalty program, whereby if you are a reliable borrower, you can avail of perks similar to air miles.

Credit Card Pros & Cons

Credit Card Pros

- Ideal for amounts <£5,000

- Interest free period

- Loyalty program perks

 

Credit Card Cons

- Not suitable for large amounts

- High interest rates after initial period

- Limits on how much you can borrow

When might a loan be the better option?

Credit cards have a maximum amount that you can borrow usually. Normally for larger amount of £5,000 and above, you should go with a loan.

When you are going to be dealing with a time period that is longer than the interest free period of a credit card, the personal loan will be the more cost effective option. This is due to the substantial rates that credit cards will charge after their initial period of grace.

You will be exposed to greater risks when using a credit card, as opposed to an unsecured personal loan. You can be hit with many additional charges when using a credit card.

Key watch outs: When it comes to a loan, you have the money in your account and you can use it in any way you see fit.

Personal Loan Pros & Cons

Personal Loan Pros

- Ideal for amounts >£5,000

- Ideal for long time period

- You have the money in your account

 

Personal Loan Cons

- Not cost effective for small sums

- No interest free period

Top Takeaway

Once you have used these criteria to weigh up which is the most cost effective avenue for you, it is an easy decision. As a rule of thumb, larger amounts of money will be better suited for loans, while shorter duration needs will be better suited to credit cards if there is an interest free/low interest period offered.

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