What are they?

The way each type of borrowing works may influence which is the best option for you.

  • Credit card: A credit card is a card that lets you borrow money and pay it back over time. What is a credit card?

  • Loan: A loan is where you borrow a cash lump sum and pay the money back in regular instalments. What is a loan?

  • Overdraft: An overdraft lets you borrow money from your bank account and go into a negative balance. What is an overdraft?

What are the pros and cons?

Credit card

Loan

  • Could borrow a larger amount

  • Better for long term borrowing

  • Can take as little as 24 hours

  • Interest rate fixed for the term

  • You pay interest on the interest

  • Some loans require security

  • Less flexible repayments

  • Charges to pay back early

Overdraft

  • Easy to withdraw cash

  • Can be quick

  • Flexible borrowing

  • Good for short term borrowing

  • Tend to be smaller amounts

  • Interest rates & fees can be high

  • Interest added to balance monthly

  • Can be cancelled at any time

How quickly do you need the money?

If you need to borrow money quickly then an overdraft or loan could be the fastest option. If your application is approved and the lender does not need an extra information:

  • Overdrafts could be added to your account in just a few hours

  • Loans could be deposited into your account within 24 hours

  • Credit cards could be sent to you within 7-10 days

If you have bad credit, or the lender thinks you may be unable to afford the borrowing, your application could take longer, as they will often ask you to send extra information.

How much do you want to borrow?

If you need to borrow a large amount a loan is likely to be the most suitable choice.

  • Loan: With a personal loan you could borrow anywhere from 1,000 to 25,000 if you meet the criteria. If you choose a homeowner loan you could borrow much more.

  • Credit card: Limits can start at a few hundred pounds, but can reach over 10,000. However, you will not know how much you can borrow up front because credit limits are based on your personal circumstances rather than you applying for a set amount.

  • Overdraft: They tend to offer the smallest borrowing, and base how much you can borrow on your personal circumstances. Overdrafts up to 1,000 are common, but they can be much larger if you have a high income and good credit record.

How long do you need to pay it back?

The amount of time you get depends on the type of credit card, loan or overdraft you choose, but usually:

  • Overdrafts have no set repayment date, although they can be withdrawn at any time by your bank and any interest free period may only last a set period, for example one year.

  • Loans tend to be better for longer term borrowing, normally between one and seven years. There are short term loans that last for less than a year, but these can be very expensive.

  • Credit cards ask you to pay back a minimum payment each month, but like overdrafts have no set end date. However, 0% deals on purchases and balance transfers only last a set number of months, currently up to around 40 months.

Getting the best deal

Whether you decide to go for a credit card, loan or overdraft you need to shop around to get the best deal because costs can vary substantially among all three.

If you choose a credit card

You need to pick a card that suits how you want to borrow money:

If you choose a loan

You need to look for a loan that:

  1. Lets you borrow the amount of money you need

  2. Gives you long enough to pay it back with payments you can afford

  3. Offers the cheapest interest rate

If you choose an overdraft

You need to look for an overdraft that will cost the least amount of money and suits the way you will use it.