Although both personal loans and credit cards will give you access to a sum of borrowed money, these financial products are completely different. Whether you are better off with one or the other will depend on a number of factors, including amongst other things, your reason for borrowing and your ability to repay.
So, why might you need to borrow?
Since the start of the recovery from the global financial crisis, many of us are again feeling more comfortable to take on debt. In fact, official figures from the Bank of England showed that UK household debt were hitting record highs, reflecting consumer optimism about the general state of our economy.
While home improvements, taking a holiday and paying for a wedding are obvious reasons for borrowing money, many seek extra finance for much smaller items such as a new laptop or car repairs. It is under these circumstances when many of us need to make a decision between borrowing through a credit card or personal loan.
When you should use a personal loan
Of course, the first step you should take before applying for any credit is to work out your personal budget, so you understand how much you can afford to repay each month without it being too much of a financial strain. Your ability to repay will impact on the amount you can borrow, as responsible lenders will only feel comfortable letting you an amount that they know you can pay back.
Some lenders will also allow you to repay early without any fees, which will save you money as interest is normally only charged for the days you borrow – The largest competitor in the market at the moment (the well publicised Wonga.com) makes a big point of displaying this feature as a selling point on their site. is an example of a lender that provides this type of loan. They have a proven track record with 95% of their customers feeling well informed about their loans, and 96% agreeing that their service is easy to use. New customers can get up to £400 within 5 minutes of loan approval, and existing customers can borrow up to £1,000.
When there is something specific you need and you only need to borrow for a short time, it is often better to go with a personal loan. This allows you to make consistent monthly repayments as set out at the beginning of the arrangement, which means you know exactly what to expect and how much you need to set aside each month. Additionally, every payment you make will include both interest and repayment of capital, so your debt will be paid off gradually.
Why not use a credit card?
There are definite advantages to using credit cards. For example, they offer extra protection for your purchases against theft, damage or if they are substandard. This is a legal requirement under the Consumer Credit Act, and covers products and services between £100 and £30,000. So if you buy a laptop on your credit card and it proves to be faulty, the credit card company and the retailer are jointly liable to remedy your situation.
Another advantage is that you won’t be charged any interest if you pay off your credit card balance at the end of every month.
So what’s the catch?
The main point to note with a credit card is that it represents a continuous line of credit. You can access it whenever you want, wherever you want. While this might seem fantastic to begin with, a credit card can change your spending habits drastically. Indeed, many real life stories of those with spiralling debts have centred on out of control credit card spending.
Apart from the need to exercise financial discipline, big credit card balances tend to build up because cardholders are only required to repay minimal amounts of interest each month. However, those who only make minimum monthly payments have in fact not paid off any of the outstanding principal, meaning the actual debt itself has not been reduced. Therefore, unlike a personal loan where you know upfront when your loan will be fully repaid, a credit card debt can go on indefinitely.
As you can see, credit cards and personal loans work differently and suit people in different circumstances, so make sure you understand them before making a credit application.
Using a financial advisor in this situation is a good idea – many money advice services online are also free and easy to use.
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Personal Capital lets you see all of your accounts in one convenient place. Sign up now for free.Author Bio: This author is interested in a range of topics including financial and political journalism. She enjoys thinking outside the box and providing readers with clear explanations to complicated topics.
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