Choosing the right way to borrow money can make it cheaper and easier to manage. Here is when you should use a credit card, loan or overdraft.
Think carefully before securing other debts against your home. You home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
Credit cards, loans and overdrafts are all ways to borrow money, but they each work in slightly different ways.
Credit Card: A credit card lets you borrow money and pay it off over time. Credit cards are generally meant for short-term borrowing in amounts ranging between £1,000 and £5,000.
They’re good for making small purchases, or spreading the cost of larger purchases over time. Each time you buy something, the lender pays for the item and then sends you a monthly bill. It will also apply interest, which you will pay as a percentage of the amount you borrow.
Loan: A loan is when you borrow a fixed lump sum of money. It has to be repaid over a set period of time through fixed monthly instalments.
Overdraft: An overdraft lets you borrow money from your bank by allowing you to have a negative bank balance. You may pay a monthly or daily interest rate for using it.
How much you need to borrow will be a key factor in your decision on whether to choose a credit card, loan, or overdraft
Credit Card: Credit cards are generally meant for short-term borrowing, in amounts ranging between £1,000 and £5,000. However, sometimes credit limits can go up to £10,000 and above.
Loan: There are several different types of loans that let you borrow differing amounts. Personal loans, for example, are typically meant for borrowing large sums of money, ranging from £5,000 to £25,000. With homeowner loans – a type of secured loan – you can borrow much more, although your home could be repossessed if you can’t make the repayments.
Overdraft: You can usually borrow up to £1,000 with an arranged overdraft, although you can borrow more if you have a high income and a great credit history. These are useful if you have occasional cash flow problems. They’re a short-term option and should really only be used as an emergency back-up, to borrow a small amount of money for a short period.
How quickly do you need the money?
The speed at which you need access to cash will play a vital part in which credit product you choose.
Credit Card: The time between applying for a credit card and receiving it in the post can be anywhere between seven days and two weeks. So, if you need the money quickly, a credit card might not be the best option.
Loans: Funds are typically approved within 24 hours, so this can help if you need to get your hands on cash in a hurry.
Overdraft: An overdraft with your bank can generally be set up in a matter of a few hours. This makes an overdraft a good choice in an emergency, such as an unexpected cash flow problem.
With any type of borrowing, if you have bad credit or the lender thinks you may be unable to afford the borrowing, your application could take longer as it may need to carry out extra checks. Often you will be asked to send extra information if this is the case.
The amount of time to repay a debt will depend on the type of credit card, loan or overdraft you choose.
Credit cards usually ask you to pay back a minimum payment each month but have no set end date. Any 0% deals on purchases and balance transfers you get will only last a set number of months, agreed at the time you take the card out
Loans can normally be repaid over one and seven years, making them better for longer term borrowing
Overdrafts have no set repayment date. However, they can be withdrawn at any time by your bank. Plus, any interest-free period you’re given may only last a set period, such as a year.
Whether you decide to go for a credit card, loan or overdraft you need to shop around to get the best deal. Costs can vary substantially among all three.
You need to pick a card that suits how you want to borrow money:
If you want to spread the cost of a large purchase, look at 0% purchase credit cards
If you want to use it to pay off another credit card, look at 0% balance transfer cards
If you want to borrow cash, look at 0% money transfer cards.
You need to look for a loan that:
Lets you borrow the amount of money you need
Gives you long enough to pay it back with payments you can afford
Offers the cheapest interest rate.
Here’s how to get accepted for a loan.
You need to look for an overdraft that’ll cost the least amount of money and suits the way you will use it.
As a general rule, you should remember that:
Overdrafts are for short-term borrowing for unforeseen emergencies
Credit cards are for short-term borrowing and can be used to spread the cost of purchases
Loans are for borrowing larger amounts of money for a specific purchase reason such as a car or holiday.
Some of the common reasons to borrow money are listed below, with the suitable types of borrowing.
Buying a car: loan, credit card (depending on the vehicle price)
Paying for your wedding: loan, credit card
A holiday: loan, credit card
Home improvements: loan
Replacing expensive appliances: loan, credit card
Debt consolidation: loan, credit card
Vehicle repairs: loan, credit card, overdraft
Unexpected bills: credit card, overdraft.
Salman is our personal finance editor with over 10 years’ experience as a journalist. He has previously written for Finder and regularly provides his expert view on financial and consumer spending issues for local and national press.