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Credit Cards & Loans

Credit cards vs personal loans: Which should you choose?

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SPONSORED ARTICLE
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Updated:
27/06/2014

Whether you are looking for credit to make vital home improvements or pay for a holiday, you will probably have two main options: take out a personal loan or apply for a credit card.

You may think that both these options offer the same outcome – getting the cash you need in a hurry. However, there are advantages and drawbacks involved whatever option you choose, and understanding them in advance will help you to make the right decision.

Credit cards

Perhaps the most significant advantage associated with credit cards is the protection they provide for your purchases. Section 75 of the Consumer Credit Act states that should your purchases be substandard, damaged, lost or subject to fraud, you will be eligible for compensation.

The credit card company is jointly liable for your loss with the retailer or service provider. Anything costing you between £100 and £30,000 is covered under the Act, and purchases of between £30,000 and £60,260 are covered under the more recent Consumer Credit Directive. Unfortunately, a personal loan does not provide the same protection.

If the purchase you are planning is relatively small, you could end up paying significantly less in interest by choosing a credit card. A small loan of only a few hundred pounds will usually have an exceptionally high interest rate attached to it, plus fees, which might prove too expensive for such a small amount of credit.

And if you pay off your credit card balance at the end of every month, you won’t be charged any interest.

Personal loans

The main problems with credit cards are the uncertainty about exactly how much you can borrow and the high interest rate they charge. Many credit card companies offer relatively small credit limits to begin with, which rise over time.

This rewards careful financial management, but it probably won’t be suitable for large outlays such as the costs associated with buying a car, home improvements and weddings.

A personal loan, however, involves the advance of a specific sum of money, which means you can plan your purchase with absolute certainty.

Credit cards require a level of financial discipline on your part, as you are only required to pay minimal amounts of interest every month. Over a long period, credit card debt can snowball out of control by adopting this approach. A personal loan involves consistent monthly repayments which are set out at the very beginning of the arrangement. Every repayment includes interest and the repayment of capital, so you will see the amount you owe reduce every month.

If you have £10,000 on credit cards at 18% (often credit cards have much higher rates of interest) you will pay £14,785 to pay it off over 5 years. With a personal loan from a company like Lending Works you could pay it off for as little as £12,087 – potentially saving you £2,698. And the monthly repayment will be £45 per month cheaper as well.

For more information, see here: http://www.lendingworks.co.uk/borrow-money/debt-consolidation-loan.

If you need to borrow more than £5,000, it is unlikely that a credit card will be suited to your needs – unless you have priority status due to an exceptional history of repaying your debts with the same provider.

However, personal loans of up to £15,000 are commonplace with various other financial institutions. As home extensions and weddings usually cost far more than £5,000, a personal loan is often your best option.

If you have a favourable credit history, and you can demonstrate your ability to repay your loan, the interest rates associated with personal loans can often be a fraction of those charged by credit card companies. With representative APRs from as little as 5 percent, this means a personal loan is significantly cheaper than a long-term credit arrangement with a credit card company.

 


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