“It can be tricky to work out which one offers what you want...”
What's the right option for me?
Are you weighing up your borrowing options and not sure whether to take out a credit card or loan? Our guide should help you make up your mind.
There are so many different credit options on the market, it can be tricky to work out which one offers what you want – and that you’ll qualify for too. So, to help you decide, ask yourself the following questions:
“A loan isn't a suitable option if you simply want an emergency fund...”
Do I need money for a one-off expense?
How you plan to use your money can determine the best borrowing option for your needs.
Loans are traditionally taken out to cover major upcoming expenses, like home improvements, a car or a wedding. You can also use them for debt consolidation. They aren’t as commonly used for day-to-day spending, as the lender will ask you what you intend to spend the money on when you apply.
On the other hand, you could take out a credit card and keep it in your wallet in case of an emergency or for a rainy day. You won’t have to tell your lender how you plan to use it, and you could just keep it to pay for groceries, petrol or other day-to-day expenses – or not use it at all.
Providing you don’t spend anything with your credit card, you wouldn’t have to make any repayments to your lender. If you take out a loan, even if you put the money in your bank account and then don’t spend it, you’ll still have to make monthly repayments with interest to your lender. So a loan isn’t a suitable option if you simply want an emergency fund or something to tide you over on a rainy day.
“As well as thinking about how you’ll spend the money and what on, you should carefully consider how you’ll repay it...”
How will I repay it?
As well as thinking about how you’ll spend the money and what on, you should carefully consider how you’ll repay it. And it’s not just how much you can afford to pay towards this each month, but also how well you feel you manage money.
When you take out a credit card, your balance each month will be different depending on how you use it. It’s a good idea to set up a Direct Debit to cover at least the minimum repayment, as if you fail to pay this you could end up with late fees and penalty charges added to your balance. However, you should aim to clear as much of your balance as possible each month so you can keep the interest you’re charged to a minimum.
By contrast, loan repayments are usually fixed so you’ll pay the same amount each month until your loan is fully paid off. On most personal loans the interest rate is fixed too, so your payments won’t vary even if interest rates change. If you like to have a clear budget to keep track of your financial commitments each month, this makes it really easy.
find out more in part 2 of our guide.