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Loans vs Credit Cards

When it comes to borrowing money, loans and credit cards are two options you have to choose from, but which is more suitable for your situation?

If you are looking to fund a hobby or pay for an unexpected bill, you may be wondering the best way to borrow money.

There are a few different options you can choose from, including credit cards, personal loans and payday loans.

While loans and credit cards are two different types of credit lenders offer, they both require you to repay the sum borrowed with interest. Each has its advantages, such as helping boost your financial status and credit score if you keep up regular repayments.

Below, we take a closer look to help you compare your options and make the best decision for your situation.

Before you borrow

Before you hit the apply button, you’ll need to consider a few things:

What is a credit card?

A credit card is a type of flexible loan from a card lender. It’s often used to pay for purchases where you may not have the available cash ready.

How it works:

  1. You receive credit from a lender, which you can then spend using their card.
  2. Each month you’ll receive a statement with what you’ve spent and what you still owe, along with a minimum payment due.
  3. You can repay in full at any time.
  4. If you don’t pay back the balance in full each month, the lender will add interest to the amount borrowed and you will need to pay the minimum amount each month.

Some lenders may offer an introductory interest-free time period, but once this is over, interest is added to the balance. You should aim to get the balance cleared as soon as possible to avoid adding on too much debt.

Pros of a credit card

Cons of a credit card

What is a personal loan?

A personal loan is the short-term borrowing of a fixed amount of money from a bank or other lender, at a fixed rate of interest over a set term. It is often used to finance a new vehicle, a house renovation or consolidate debt, but can be used for any purpose.

How it works:

  1. You receive your loan in one lump sum.
  2. You pay back the loan in regular monthly instalments.

Pros of a personal loan

Cons of a personal loan

What is a payday loan?

A payday loan is a short-term loan, usually for a small amount of money to cover unexpected or urgent payments. While these types of loans can be easy to get accepted for, they tend to come with a high interest rate – you can shop around to find the best rate.

Just like personal loans and credit cards, lenders will carry out credit checks to ensure you can pay back the loan.

How it works:

  1. You receive your loan as a lump sum.
  2. You’ll then pay back the amount – these loans are typically paid back within the month.

Pros of a payday loan

Cons of a payday loan

Payday loan vs credit card vs loans – which is better?

If you’re looking to cover a one-time payment or urgent cost, payday loans can give you a small amount to replace a broken boiler or pay for unexpected car maintenance. Just make sure the repayment won’t affect your other financial commitments before you apply.

However, if you plan to borrow small amounts of money more regularly, then a credit card with an inviting 0% introductory rate could suit your situation. Regular full repayments can have a positive effect on your credit score, as you’re demonstrating responsible financial behaviour to lenders.

For larger amounts, a personal loan with lower interest rates and fixed terms would fit the bill. Bear in mind that, unless used wisely, the credit card and payday loans come with more risks – especially if you find yourself not being able to clear the full balance at the end of the month. In this case, the straightforward fixed terms of a personal loan provide peace of mind with a steady monthly repayment plan.

Depending on your circumstances and how you manage your money, you may find that one type of borrowing is more suitable for you. It is always best to do your research, compare your options and take a look at what is on offer before you decide to go forward with an application.

Looking for more advice on improving your credit score? Check out the full range of articles from our Know How hub.


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