• Home » Finance » Loans versus Credit Cards

Main Categories

Books and Mags
Business
Clothing and Footwear
Dating
Electrical
Experience Days
Finance
Food and Drink
Freebies and Competitions
Gadgets and Other Gifts
Gambling
General
Health and Beauty
Home and Garden
Jewellery
Lingerie
Mobile Phones
Motor
Music and Video
Romance
Software
Sport and Leisure
Toys and Games
Travel

Shop in UK News

Read all the latest news from the world of shopping in our new blog. You will find new products, discount codes and news from online retailers.

Loans versus Credit Cards

Loans versus credit cards

If you are looking to raise some money then you may well be considering turning to the lending sector. Traditionally, consumers looking to borrow money would approach a bank or other financial institution and take out a loan. Nowadays, there are far more options open to us. For a start you can now take out loans in diverse places such as supermarkets and department stores and you can also bypass the loans process and use your credit card to raise cash instead.

A brief introduction to borrowing on loans and credit cards

One of the first things you need to consider at this point is how much money you want to borrow. It may well be that this factor will make the loan versus credit card decision for you. In general terms, if you want to borrow a large lump sum to do or buy something big then your credit limit on your card may not be big enough. So, for example, if you want to raise the cash to finance the design and build of a new conservatory for your home then the chances are you will need a personal loan unless you have a significant credit limit on your credit card. This obviously is not an issue with smaller sums of money.

The next major consideration is the interest that you will be charged on the money that you borrow. The figure that most accurately gives you a comparative rate for interest charges is the Annual Percentage Rate (APR). Get a low APR and you'll be charged less interest. Get a high one and you'll be charged more. It is hard to give lists of standard APRs at any given time -- they vary widely from company to company and change on a frequent basis. Generally speaking, the APRs charged on credit cards will be given at a higher rate than those given to loans products especially if you take out a secured loan product where you guarantee your borrowings with collateral.

One way round the difference in APRs is to look at taking out a credit card offer that cuts traditional APRs for you. So, for example, you could take out a balance transfer deal or special introductory offer -- rates for these kinds of offers can range from zero percent interest up. Some credit card providers will offer promotional rates for balance transfers directly into your bank account so that you can use the funds as you need. Always check with the provider as to the applicable rate as a standard cash interest rate on a credit card can be extremely high. Do factor in here how long the deal will last to make sure that you'll have enough time to make it work for you and to repay your borrowings according to your plan. Credit card deals are available for timescales typically ranging from three months to 12 months plus.

It's also important to think about how you want to make repayments on the money that you borrow. If you take out a loan for example that is given at a fixed rate of interest then you will be told how much you will pay back overall and how much you will make as a repayment every month. No matter what happens to interest rates these figures will not change. This kind of repayment schedule can suit many people who like to know exactly what their regular budget is.

Credit card repayments, however, do not give you the same kind of structure and it can be hard to estimate how much you will need to repay on money that you spend on the card as this partly depends on the way / speed in which you pay off your balance. Some people like the flexibility that they get here, however, as monthly repayments can be varied to a degree. The commitment you make to the credit card company is to make a minimum payment every month which will be based on how much you owe. Most credit card providers average this to pay off the balance over some three years. You can of course pay off higher monthly amounts if you have the money spare.

Do be aware, however, that with the exception of promotional deals, interest will keep being added to your credit card balance until it is completely repaid. Thus, if you take a long time to repay your balance you'll start to find that you are being charged interest on your interest as well as on your borrowings.

It's always important to read the terms and conditions before applying for any loan or credit card as you don't want to get caught out with hidden costs and clauses down the line. For example, most balance transfer credit card deals will involve a set up fee, typically of around 2-3% of the amount being transferred so this cost may need to be factored into your calculations. Equally, many loans have early redemption charges that may be levied if you try to pay off your loan before the end of its term.

Taking care of your credit rating

Many people don't realise that making an application for a credit card or loan will show up on their credit rating. So, if you make a lot of applications in the space of a few months then they'll all show up on your account. The problem can arise that this kind of behaviour can put off new lenders in the future who may think that it is suspicious. If they do not view multiple applications kindly then they could mark you down credit score-wise which could mean that they ultimately turn down your application. To avoid this happening make sure to ask for quotes first -- don't make an actual application until you've chosen the right credit card or loan to suit your needs at the right price.

On this subject, it is always worth exploring the offers available from your current card providers first before considering applying for any new products. If you have a good repayment history with them, many card providers will be happy to offer you a loyalty or promotional rate, obviating the need to take out a new product.

Conclusion

Do think long and hard about your finances before you decide to take out a new credit card or loan. Bear in mind that many people fall into financial difficulties because they fail to realise that they cannot actually cope with the cost of their repayments. For this reason do try and put together a budget and make sure that you can make your repayments comfortably. Remember, it is not the lender's job to make sure that you can repay your borrowings, it's yours.