A simples guide

Is it better to borrow with a loan or on a credit card?

When you need a bit of extra cash, deciding how to get hold of it can be a hard decision to make. You can always try tapping up friends and family (tricky and awkward) or you could try raiding the piggy bank (probably empty) and it’s unlikely you’ll find anything down the back of the sofa. So it’s often a choice between a loan or borrowing on a credit card – but which to choose?

Know how much you want to borrow

How much money you need will influence whether to borrow on a credit card or take out a loan. If you need a relatively small amount, then a credit card could be the better option. But if you need more of a lump sum for large purchases such as a car or home renovations, then a personal (unsecured loan) might be the better alternative.

Is it better to borrow with a loan or on a credit card?

Credit cards vs. loans

Some credit cards give you the option of a 0% interest purchase period which is a cost effective way of borrowing money – you’ll only pay back what you’ve borrowed – sounds good right? But you’ll need to be disciplined and make sure you pay off what you’ve borrowed within that 0% interest time frame and make sure you meet your minimum monthly repayments on time, otherwise interest rates can rocket.

Using a credit card can give you some flexibility in terms of when you pay back the money (as long as you remember to do it before the 0% interest free period finishes) and how much you pay each month, you won’t be saddled with any early repayment fines if you find yourself paying back more to clear the debt earlier.

One big advantage of borrowing on your credit card, is that the purchases you make with it, are protected under the Consumer Credit Act. This means that anything you buy that costs between £100 and £30,000 is covered in the event of the company you bought it from goes bust or if anything goes wrong. This is thanks to Section 75, which states that the credit card company and the supplier are jointly responsible, you can make a claim against them to recover your costs should anything go wrong.

It’s good to know that you don’t have to pay the full amount of an item to get this protection and you don’t have to put a minimum of £100 on your card – it’s just as long as the item itself costs at least £100.

When might a personal loan be better?

Interest rates on personal loans will usually be lower than anything you’d get on a credit card (unless it’s a 0% card). Some lenders offer personal loans of up to £25,000 so a loan’s better for big buys or lots of little things that’ll add up. It also tends to be that the more you borrow, the better the interest rate. You’ll agree with the lender when to pay it back and this, combined with the interest charged will determine how much your monthly repayments will be.

If you need to borrow money over a longer period of time, then a loan might be the way to go as you’ll usually be able to pay it back over a few years. There’ll also be a structured repayment plan – but stick to it, missing a month means you could be hit with heavy fines.

What about my credit history?

Before you’re given a credit card or can take out a loan, the lender will give your credit history a once over. Having a decent credit score means you may be given access to the best interest rates and highest credit limits because there’s less chance of you defaulting on the debt. If your credit report is less than A* then be prepared for less favourable terms but manage your money wisely and in time you’ll be gold star worthy.

checking my credit history

Getting a good deal

So, loan vs credit card? It’s all about getting the right deal for you so why not see what’s on offer and start comparing the market for credit cards and if you find plastic isn’t so fantastic for what you need then simply start comparing personal loans instead. So what are you waiting for?

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