Whether you take out a loan or increase your credit card limit to get your hands on the cash you’re after depends on your own needs.
But we understand it can be a tricky choice to make if you don’t know what the advantages are to each.
Let’s take a closer look.
Take out a loan
Loans are designed to provide you with a set sum of money that’s agreed upfront with the lender and then paid back – with interest – over a period of time that’s also agreed in advance with the lender.
There’s two types of loan you can take out: secured and unsecured. Secured loans (also known as homeowner loans), as the name suggests, are secured to your property. Unsecured loans (or personal loans) aren’t.
If you plan to borrow a significant sum of money, perhaps to fund a home improvement project, a secured loan may be your best bet. These loans usually provide larger sums than personal loans and have a lower interest rate. The repayments are then spread over a longer period to make them more manageable.
A personal loan, meanwhile, often has a higher interest rate because it’s not secured to anything. It is also designed to lend you a smaller sum of cash for a shorter period – but your home isn’t at risk, as it would be if you didn’t make your repayments on a secured loan.
If you have a particular purchase in mind, you may prefer to take out a loan to pay for it than use your credit card. Loan repayments and the interest attached to them are fixed, so budgeting is straightforward. Plus, you know upfront when you’ll finish making your repayments.
However, you may not yet know exactly how much you need to borrow and be after something more flexible. That’s where credit cards come in.
Increase your credit card limit
Credit cards are designed for flexible borrowing. Rather than state how much cash you need to borrow upfront, you borrow as you spend and then get a bill for this at the end of the month.
If you use it right, a credit card also lets you borrow interest-free. For the first 30 days after you make a purchase, you won’t be charged any interest. So, as long as you pay off your credit card balance in full within this time, you’ll only pay for what you spent – no more.
Of course, this means you need to be savvy with your spending and only spend what you can afford. If you need to make an expensive purchase, this may not be possible.
Credit cards often have lower interest rates attached to them than loans, but they’re designed for you to borrow smaller sums. If you want to borrow more, you could speak to your lender about increasing your limit.
Whether this is possible will depend on a number of things, including your credit history. This is a record of your borrowing over the past few years, and if you have struggled to keep up with credit card or loan repayments previously, it can act against you.
What works for you?
As we said at the start of this blog, whether you choose to borrow with a loan or credit card comes down to what you need the money for and your own preference. If you like the security of knowing exactly how much you’ll pay each month and you also know exactly how much you want to borrow, a loan could be the best choice.
On the other hand, if you want flexibility, a credit card could be better. And if you’ve shown you’re a responsible credit card user, it may be possible to increase your credit limit so you can make larger purchases.
We hope now you know some of the advantages of each that you’ll find it easier to choose whether a credit card or loan is right for you.
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