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.
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 have a negative bank balance.
How much you need to borrow will be big 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. Credit cards are often used for small purchases, or for making larger purchases and spreading the cost over time.
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.
Overdraft: You can usually borrow up to £1,000 with an 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.
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. They’ll often ask you to send extra information if this is the case.
The amount of time you get depends on the type of credit card, loan or overdraft you choose. But:
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:
You need to look for a loan that:
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:
Some of the common reasons to borrow money are listed below, with the suitable types of borrowing.
Need a loan? Compare loan lenders side by side to find one that is cheap to pay back, lets you borrow what you need and has repayments you can afford.