Are you looking for a UK Guide on Credit Cards v Loans in January 2020? At some stage in our life most of us will have to borrow money, so find out everything you need to know in this excellent Loans vs Credit Cards section!
In basic terms, a loan and a credit card do the same ‘job’, they provide consumers with easy access to money. This can be for a house extension, a new car, a sofa or even a holiday, but which one is correct for your needs?
At the end of the day, Loans and Credit Cards work in different ways, there’s pros and cons to using both. Let’s take a closer look in more detail…
Credit Cards Advantages
0% Credit Card Deals – Most people love to take advantage of 0% credit card deals, most providers will offer good interest-free periods and introductory rates for new customers. This means for savvy consumers who pay off their balance in full at the end of each month, they won’t have to pay any interest on their borrowing. Some UK providers can even offer 0% on purchases for as long as 30 months! That means if you’ve purchased a new bed for example, you can ‘spread’ the payments and as long as the full amount is paid for by the 30th month, you won’t be charged any interest.
Money Transfers – You’ll also find that most UK credit card providers allow money transfers from your card directly into a current bank account. This can be great if you need cash instantly and in ‘most cases’ the rates are lower than if you were to apply for a personal loan.
Consumer Protection – If you purchase an item costing between £100 and £30,000 using a credit card, the card provider is ‘equally liable’ with the retailer if something goes wrong. This is stated in Section 75 of the Consumer Credit Act. For example, let’s say you ordered a new sofa for £1,000 and the store you purchased it from goes bankrupt before its delivered to your home. The credit card provider should issue a full refund to you under Section 75.
Easy Access – Of course one of the major ‘plus points’ for credit card use is the fact it’s very easy for people to apply and be accepted. In the UK there’s around 160 million credit cards and the process to open an account can be done within minutes. For further information on the latest credit card deals and offers, please click on the link below.
Credit Card Disadvantages
Interest Fees – It’s important that when using a credit card, you’re in control of your overall budget and spending habits. To make a credit card work for you, you need to be disciplined about paying off the balance in full at the end of every month. Otherwise, you will be charged interest (if no interest-free or introductory offers are applicable). Remember these interest fees can be quite high, depending on your card provider, so read all the terms and conditions before agreeing and opening a credit account.
Low Limits – You’ll find that credit card companies will set your ‘credit limit’ according to your own personal circumstances. This can and will vary from person to person. For example, students may only get a credit limit of £500 whereby a full-time worker may get £15,000+. This means if you need access to money for a large purchase you may not be able to borrow the amount you require.
Low Minimum Payments – While it may seem a good thing that credit cards offer low minimum payments it can be bad for some people. Typically, most cards will have a monthly low minimum payment which obviously needs to be met each month, this can be as low as £20 or higher than £100, it really does depend. If you only pay the minimum amount it will take longer for the debt to clear, this means in the ‘long run’ you’ll end up paying more in interest.
Hidden Fees – Some card providers will have additional fees, this once again varies from company to company. Fees can include an ‘annual charge’, ‘missed payment fee’ or even a fee for NOT spending on a credit card. As each company has different requirements, all documentation should be read before agreeing or opening any account.
Advantages of getting a Loan
Larger Borrowing – For most people who apply for a loan, they’re usually able to borrow more money than using a credit card. Equally for loans over £5,000 the rates are quite competitive giving consumers an even greater choice of providers! For further information please click on the link below to visit our fantastic section full of the latest deals and offers from leading UK banks, providers and companies!
Flexibility – Another good advantage of a loan is the simple fact that consumers can generally ‘decide’ how long the repay needs to be. This means its easy to ‘spread’ payments across a short or large period, depending on individual circumstances. Some people like short term loans which can be paid off within a year or two, while others like longer term loans of ten years or more. Knowing exactly how much you’ll pay each month, how much interest you’ll also pay in total and that the balance will be paid off in full at the end of the agreed term can be a real ‘plus-point’ for those who are considering a loan.
What does APR Mean?
When applying for financial products such as a loan, credit card or mortgage… APR is used as a way of measuring the interest rate and any additional charges which may be applied.
So in basic terms, annual percentage rate (APR) is the yearly rate charged for borrowing or earned through an investment. You’ll typically find that APR is expressed as a percentage; such as 20% APR. That represents the actual ‘yearly cost’ of funds over the term of a loan.
Disadvantages of a Loan
Fees – Generally if you’re wanting to borrow a ‘small amount’ of money, a credit card may offer more competitive rates than a short-term loan. Of course, this isn’t always the case, however in most instances a credit card will be cheaper for most people. On the contrary for long-period borrowing a loan will usually be more competitive than a credit card. Like most things in life, you need to study your own situation and think about which method is best for your budget and circumstances.
Higher Rates – In most cases if you want to pay off your loan early, there will most likely be a penalty charge. Typically, this works out at around two or three months of interest, however this amount can and will differ from company to company. This is why it’s definitely worth to read all of the documentation before signing up to a loan.
Circumstances – Typically loans are only granted for people who have a ‘decent’ amount of disposable income, are a home-owner or have a good paying job. In most cases people who cannot provide an acceptable way to ‘pay back’ a loan will either be rejected or receive a lower limit than they had hoped for. Of course, once again this varies massively from person to person and the only way of knowing is to apply.