MoneyMagpie

May 26

Demystifying the differences between loans and credit cards

Both loans and credit cards are great ways to borrow money, but which should you choose? It’s important to meditate on which path will be right for you. Pull up a cushion and read on – I have more wisdom than you can shake a joss stick at.

 

How loans work

Demystifying the differences between loans and credit cardsYou apply to borrow some mullah from a loan provider, and if they’re happy to lend to you, they’ll make you an offer. This will explain how much you’re borrowing and when you need to pay it back. If it’s fixed rate, you’ll also be told exactly how much you’ll repay. If you agree to the offer, you’ll receive the money as a lump sum, and then start to repay the loan as agreed.

Here’s an example: Leila is relocating for a promotion with her employer. She’s found a sweet little flat, and decides to borrow some money to set up her new home. She applies to borrow £10,000 over three years and is accepted. She settles in and can easily afford the repayments on her new salary. Happy times, Leila (when’s the house-warming party?).

 

Loans are wise for:

  • Borrowing an amount of money for a certain period of time with fixed repayments.
  • Borrowing larger sums of money, as interest rates are usually lower for larger amounts.
  • Consolidating debt. If you pay off old loans or credit cards, you might be able to reduce monthly payments or interest charges.

 

Loans are bad for:

  • Borrowing small amounts, or for a short time. This is because the interest rate is usually higher on these types of loans.

 

Things to watch out for with loans

Loan providers don’t usually charge all their customers the same rate, and your credit score may affect the rate you’re offered. However, as they want to advertise their most alluring deals, they quote a ‘representative’ rate or a ‘typical’ rate on ads.

To cut a long story short, when you make your application, you may not be offered the rate you saw on the adverts, and different providers may be able to offer you higher or lower rates. As always, it’s better to compare and be aware.

 

How credit cards work

Demystifying the differences between loans and credit cardsYou apply for a credit card and if your application is successful, you’ll be given your card and a credit limit that you can spend up to. You’ll need to make a minimum payment each month (which will depend on the balance), but you can pay off the balance as soon as you like. If you can, it’s good karma to pay off more than the monthly minimum – this way, you’ll end up paying less interest.

There are different types of credit cards to suit different circumstances. It’s horses for courses, so shop around and see what works for you. For example, if you already have a credit card, you might be able to transfer your balance to a new card for a lower rate. Some providers offer a splendid low rate for new customers and others come with rewards, like air miles or Nectar points.

Here’s an example: John’s fridge and computer both give up the ghost in the same week and he’s low on spondoolies. He applies for a credit card with 0% interest on purchases for the first six months and buys a new laptop and fridge. He manages to pay off the balance before the six-month, interest-free deal ends. Which means he pays no interest and finds inner financial peace. Well played John, my hypothetical friend.

 

Credit cards are wise for:

  • Quickly paying for stuff when you need to. Many credit cards include insurance on items over £100, which have been bought with the card. This can be particularly handy karma if you shop online. Some providers offer low rates for a fixed period to encourage people to choose them. This could be the enlightened choice if you need to buy something quickly that you can pay back within the fixed period.

 

Credit cards are bad for:

Longer-term borrowing. The rates on credit cards are usually higher than loans, so if you don’t reduce your balance quickly, you might pay more in interest than you would’ve done on a loan over the same period.

 

Things to watch out for with credit cards

Beware the penalties, my friend. If you’re late with a payment, you may get charged – or even disqualified from any fixed rate offer – and that’ll really puncture your peace pipe.

Beware the lure of easy spending. Many people find themselves running up a lofty balance on their credit cards and only making minimum payments. If you can’t repay the balance on your card, a loan may save you money.

 

Compare and be aware

If you’re seeking a loan, it couldn’t be simpler to compare personal loans at MoneyGuru.com. Here you’ll discover all the loan wisdom you need. Simply enter the amount you wish to borrow, for how long, and they will show you a range of options. Tick any that interest you, and then compare them side by side.

If loans aren’t your style, why not compare credit cards? Money Guru’s credit card comparison page is home to a fountain of financial knowledge. Or watch my video teaching on credit cards to help you meditate on what matters to you.

 

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WHAT DO YOU THINK?

67 thoughts on Demystifying the differences between loans and credit cards

  1. I steer clear of short-term loans with their outrageous interest rates and use my credit card instead. The interest rates for short-term loans should be capped!

    Reply
  2. Can you improve your credit score if you haven’t borrowed before by using credit cards and paying them off ? If so how and which company is best to go for ?

    Reply
  3. I have always been confused as to which is better for my credit score. I do like to use my credit card to increase it reguarly.

    Reply

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