Credit card versus personal loan
Credit card versus personal loan

When looking for credit to meet your needs in times when you do not have cash, there are two simple personal credit options. The first is to apply for a credit card that affords you access to an available credit based on your income and credit worthiness. The other option is a personal loan. Personal loan options allow you to borrow money for a specific amount that is repaid over a set period of time with monthly capital and interest payments.

There are inherent advantages and disadvantages with both personal loans and credit cards. The key is to analyse your needs and shop around to find the product that meets your requirements.

Personal loans

Personal loans are borrowing that is given for a specified amount that has a specific repayment period and monthly payments that include partial repayment of the amount borrowed plus interest.

You can get either secured or unsecured loans. The former are where the loan is secured against something of a great value, such as your home. Therefore, should you default on your monthly repayments, the lender could seize you home in order to get his money back. Unsecured borrowing will cost you more in interest as it is not secured against anything (meaning that the lender is taking a bigger risk by giving you credit), but may give you peace of mind that your home is not at risk of repossession should disaster strike and you can no longer meet the monthly repayments.

With secured lending you can normally borrow a much larger sum of money over a longer period of time, as you will be less of a risk to the lender by providing a form of security. .

Minimum loan amounts for an unsecured personal loan typically range from £1,000 upwards. Maximum amounts for those with good credit are generally around £25,000. Borrowers seeking a loan greater than £25,000 must usually be willing to offer property as security to the lender – ie take out a secured loan - especially when bad credit is involved.

What to look out for when you go shopping

When you go shopping for a personal loan, it is important to examine the lowest interest rates, as well as the features and repayment periods of the loan. Borrowers also need to consider often overlooked factors such as the ability to pay off the loan before the end of the period without penalty. Many lenders will charge you an amount normally equivalent to two months’ interest should you pay your loan off early. This is called an Early Repayment Charge (ERC).

Credit cards function differently than personal loans. Rather than providing a specified loan amount, credit card companies offer you a certain amount of available credit at either a fixed or variable interest rate when used. Applying for and receiving a credit card does not normally cost anything, although some banks do charge application or annual fees. Typically, though, you only pay interest on credit used when purchasing products or services with the card.

Credit cards

Credit cards are more suitable for borrowers that do not have a particular amount in mind when borrowing. Credit cards give spending flexibility to consumers who want to have access to credit when cash flow is not adequate. Personal loans, on the other hand, are more for users who have a goal or purpose in mind, and need to borrow extra cash. Buying a car; carrying out major home improvements; or similar large purchases would likely require a personal loan based on the specified amount.

In the end, it is down to what option you decide is best for you and you need to consider the interest rate payable and the time frame in which you can comfortably afford to repay the debt off.