If you’ve been trying to decide whether or not to use a credit card or personal loan for finance there are many things to consider.
Depending on your credit limit and the price of what you are purchasing, you may be surprised to learn a credit card may work out more cost efficient than a personal loan. Many credit cards come with the perk of an interest free period. These periods vary in length but the maximum on offer is longer than a 2 year period.
If you are able to clear the debt off within this time you will save money as you won’t be paying the interest on a personal loan and clearing the debt. If you haven’t cleared the debt off within the specified period, depending on you your credit score, you could potentially transfer the remaining balance to another interest free credit card to finish paying the debt off interest free.
If you don’t think you would be able to pay the debt back within the interest free period, you could look for a card with a low interest rate that would last for the duration of your payments. You could spend less on interest than you would with a personal loan. Check how much you would be spending monthly and see what is best for you.
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Depending on what you’re buying and where you’re buying it from, you may not be able to pay by credit card but only by debit or cash. If this is the case, you could get a card that allows money transfers. This means you could transfer money to your bank account which you can then withdraw or spend by debit card. Doing it this way will cost extra as there will be a fee but it means you can pay up the card as normal and get access to the funds to pay companies who don’t accept credit cards. Again, check the fees and interest rates and calculate if you would spend less money overall than you would with a personal loan.
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If you need a substantial amount of money, you may be unable to get a credit card with a high enough limit. In that case, you would need to go down the route of a personal loan. Borrow the smallest amount possible in order to meet your needs and choose the shortest repayment term possible that is affordable for you. Make sure you take into consideration what your current incomings and outgoings are and don’t overstretch yourself and put yourself in a difficult position.
It’s easy to be tempted into borrowing more and increasing the repayment term, however, you will cost yourself a lot more in interest in the long run. For example, if you borrowed £8 000 at 9% over 4 years, you would pay £1 555.86 in interest but if you borrowed the same amount over 10 years, you would pay £4 160.87 in interest.
How much is your overdraft costing in fees and charges? Overdrafts are often overlooked and you could potentially save money every month by considering switching the type of your account or your bank.
Another factor to keep in mind is it may cost you less to borrow slightly more. This doesn’t mean borrow thousands more than you’d planned. Check the individual loans interest rates and thresholds and you may find borrowing £4500 costs you more overall than borrowing £5000, depending on the interest rates. Surprisingly, some companies charge up to 33% more interest on a lower loan than a higher one, so you would end up spending more overall once the interest had been accounted for.
Make sure to check for hidden costs when considering a personal loan. You are entitled to pay loans off early but you may be subject to a fee which is usually around two months’ interest. You are also able to make overpayments to your loan without charge, (depending when you took the loan out if it is pre-existing and how much the overpayments are).
Have you been given conflicting information about the impacts of bad credit? We’ve dispelled some of the common bad credit myths to enable you to make an informed decision about what step to take next.
Many loans have lock-in fees meaning if you want to switch to a cheaper interest rate, you will be fined for moving. In this case, you will have to determine whether it is cheaper to stay on the higher rate of interest or transfer to a lower rate and pay a penalty. It may actually be cheaper to stay where you are depending on how much the fee is. Always check what the early repayment fees are before taking out a loan or check the terms and conditions in your paperwork if you have an existing loan.
Finally, remember the interest rates advertised for credit cards and personal loans are representative. This means, 51% of people who apply will receive these rates. The other 49% will pay extra. The only way to find out what rate you will be offered is to apply and this will affect your credit score so do your research before deciding where to apply.