Borrowing money can be a sensible way to cover the cost of something you can’t pay for outright – providing you don’t borrow more than you can afford to repay, of course. If you are thinking about taking out credit, you’re probably trying to decide on the cheapest way to do it: a credit card or a loan? There’s no right or wrong answer – it all depends on your situation, how much you want to borrow, and what your credit rating is.
Interest rate and credit rating
If you’ve got a good credit history, you’re probably best off getting a credit card that comes with a 0% APR period offer, which beats the best loan rates in the market – currently around the 5% APR level. Some providers offer 0% purchase credit card deals for up to 23 months now, so if you’re eligible for one of these, this will be the cheapest way to borrow – particularly if you can pay off what you owe with the interest free period. Bear in mind of course that at the end of the offer period the interest rate will rise significantly, and if you haven’t cleared the balance, this could prove costly.
These cards are only for those with good credit history though, so if yours isn’t so good, you may have to get a credit card with a shorter 0% APR period, or a card with as low an APR as possible.
If you’ve had real problems managing your credit score in the past, you might not be eligible for these deals, so you could be better off with a personal loan. You might want to do some ‘soft searches’ to see if you’ll be able to get a loan or a credit card, as if you apply and don’t get accepted, this will show up on your credit report. Money Saving Expert has a range of credit card and loan eligibility calculators, which allow you to do a soft search, so you can see which you’re likely to be eligible for and at what interest rate.
When you take out a loan, you’ll commit to repaying a certain amount each month until you’ve cleared the balance, with a set amount of interest that’s worked out at the start of the agreement. This might be suitable for you if you stick to a strict budget, your bills are roughly the same each month, and you always get paid the same amount. As long as you keep up your repayments for your loan, you’ll always know how much your monthly payments are. You may even be able to settle a loan early – though there are often early repayment charges for this, so double check the T&Cs.
If you want the ability to pay back a different amount each month – for example, if you earn a flexible amount, or you’ll just be able to afford different payments each month – a credit card beats a loan. For example, with a credit card, you’d be able to clear the balance if you come into some money, without there being any early repayment penalties.
Amount you want to borrow
If you’ve already got a credit card, you should know what the limit is on it. However, if you’re thinking of applying for a new one and you are accepted, the amount of money you’ll be given access to will differ depending on the state of your credit rating. If your credit rating isn’t the best, you might only be accepted for a lower credit limit – which might not be the amount you need to borrow to make your purchase.
With a loan, you’ll only apply for the amount you actually need, so you won’t end up getting accepted but not having enough credit to buy what you want. Loans are usually more suitable for larger amounts of borrowing, as you pay them off over a longer period of time.
Control and temptation
If you borrow on a credit card, once you start to make the repayments and reduce the balance, you’ll be able to spend the money again. This means that you might be tempted to go out spending, so if you think this is a risk, you might be better off getting a loan.
When you take out a loan to cover your purchases, the balance will decrease as you make your monthly repayments and you won’t be able to spend the money twice – which is good if you ever struggle to manage your spending.
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.