Loan or credit card?
In certain borrowing situations you may find that using a credit card makes more sense than applying for a loan. Here is a short guide to help you decide whether your borrowing options will be better met by a credit card or a loan.
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Loans |
Credit cards |
| Pros |
- If you opt for a fixed rate loan there will be no interest rate surprises during the loan term. You will always know what your repayments are from month to month.
- Depending on the product you choose you may be able to take payment holidays each year.
- Depending on the size of your loan and your credit record, a loan offers lower interest rates in comparison to credit cards.
- If you have a poor credit rating you can still borrow affordably by opting for a secured loan.
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- If you opt for a credit card that offers an interest-free period at the start, you can borrow money without paying any interest, as long as you repay the debts within the interest-free period.
- Your repayments on credit card debts are much more flexible than on loans. You will have a minimum monthly repayment that must be honoured; by making regular overpayments on top of this minimum payment you can repay your debt faster and pay less interest overall.
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| Cons |
- Loans are a lot less flexible than credit cards, especially when it comes to wanting to repay the debt early. You may have to pay an early repayment charge for settling your loan before the end of the agreed term.
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- Unless you are able to take advantage of an interest-free period, the interest rate on credit cards is generally much higher than what you might typically be charged with a loan. This can make your debts more expensive overall, especially if you take a long time to clear the debt. |
| In summary |
If you have a bad credit rating, consider opting for a secured loan, as this may be your best option to borrow affordably. The interest rates on credit cards for bad credit applicants can make borrowing on a credit card extremely expensive.
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If you are looking to borrow a small amount and are expecting to repay the debt quickly, a credit card will be your cheapest borrowing option. Otherwise, opt for a fixed rate loan, which will help you to manage your budget with regular monthly repayments and a stable interest rate for the duration of the loan. |
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