Should I consider a loan, credit card or overdraft?

There are benefits and risks for each borrowing type, depending on your current credit needs.

A summary on personal loans

If you’re approved for a loan, the money will be deposited into your chosen UK bank account, ready to use for a range of purposes, from financing a car purchase, to home improvements and debt consolidation.

If the interest rates are fixed your loan repayments will be too, making it easier to understand your borrowing costs and keep track. If interest rates are variable, your repayments and borrowing costs may change over time.

More about personal loans

A summary on credit cards

A credit card can be a simple and flexible way of borrowing money to make purchases, manage unexpected costs, or consolidate existing debts by completing balance transfers.

Depending on the interest rates that apply to your account, a credit card could be a cost-effective way to manage your borrowing needs.

How a credit card works

A summary on overdrafts

An arranged overdraft acts as a short-term safety net on your current account, whether you need a little extra to cover unplanned expenses, or just to tide you over when you’ve run out of money.

If you apply for an arranged overdraft and you’re approved, you’ll only be charged daily interest if you use it. It may not be the cheapest way to borrow, but as a short-term solution, it could be useful.

More about personal overdrafts

 

If you’re planning to use credit

When you apply for credit, lenders and service providers contact their preferred credit reference agencies to check your credit record. This may highlight any potential risks associated with offering you credit, and can influence the interest rates and any amount of credit you’re offered.

Not only that, but lenders and other service providers complete their own credit scoring (PDF 915kb) when you apply for credit, including information from your credit record, as well as other factors like affordability and past account history.

All lending is subject to an assessment of your circumstances.

With any form of borrowing, fees and interest may apply. To keep these costs down, you should only borrow what you can reasonably afford to repay, over the shortest possible term.

More about credit scores

Why choose a personal loan?

Personal loans are available from banks, building societies and other finance companies. You may be able to apply online, over the phone or in branch.

Personal loans are a common way to borrow in order to buy a car, fund home improvements, tackle existing debts, manage unexpected bills, or pay for an event, like a wedding, or holiday of a lifetime.

Decide how much you’d like to borrow, what you can afford to repay, and then set a term to suit your budget. Personal loans are typically available for 1-7 years.

You might like to try a loan calculator to estimate your monthly payments.

Any time you borrow, you’re making a commitment to responsibly manage and repay any debt, as well as any interest, fees and charges which may apply.

Benefits of a personal loan:

  • Some lenders offer a quotation before you apply for a loan, helping you to understand if you’re likely to be eligible, without impacting your credit score and record.
  • If you go on to make a full application, you could get an instant lending decision. Depending on the lender and when you apply, funds could be in your bank account the same day.
  • If the interest rates are fixed, your loan repayments will be too, making it easier to keep track and understand your borrowing costs.
  • At the end of the loan term everything will be paid off, so long as you’ve made all of the required payments.
  • The structured nature of a personal loan also means your interest rates could be lower than those on credit cards or overdrafts.
  • On selected loans, you may be able to make overpayments without early repayment charges, potentially reducing your overall term and borrowing costs.
  • For an unsecured loan, you don’t need to be a homeowner to apply.
  • Using and managing a loan carefully could, over time, help to improve your credit score.

Drawbacks of a personal loan:

  • A personal loan isn’t as flexible as a credit card or overdraft for managing ongoing credit needs. To borrow more, you’d need to apply for an additional credit product.
  • If you choose a personal loan with variable interest rates, your borrowing costs and monthly payments may change over time.
  • Whether or not you’re accepted, ‘hard’ credit searches could affect your credit score, especially if you make a number of full applications for credit in a short period of time.
  • Carrying a lot of debt could affect your credit score and your ability to secure further credit in the future.
  • On some loans, early repayment charges may apply if you want to overpay, or clear your balance before the end of the loan term.
  • You may need to be a homeowner to get a secured loan. In addition, you could lose whatever the loan is secured against if you don’t keep up with repayments.
  • Purchases made using cash, a debit card or bank transfer won’t be covered by Section 75 of the Consumer Credit Act 1974, unlike some purchases made using a credit card.

More about personal loans

Why choose a credit card?

Credit cards are offered by banks, building societies, other finance companies and even retailers.

As well as everyday spending, credit cards offer a flexible way to contribute to a car purchase, fund home improvements, manage existing debts and emergency expenses, or pay for an event, like a wedding, or holiday of a lifetime.

Any time you borrow, you’re making a commitment to responsibly manage and repay any debt, as well as any interest, fees and charges which may apply.

Benefits of a credit card:

  • Some lenders offer credit eligibility tools, helping you to understand if you’re eligible for a credit card, without impacting your credit score and record.
  • If you go on to make a full application for credit, you could get an instant lending decision. Some lenders allow you to request balance transfers as part of your application, helping you to take advantage of your account benefits as soon as your application is approved. Just be aware that transfer fees may apply.
  • You don’t need to be a homeowner to apply for a credit card.
  • An introductory or promotional rate could offer low or even 0% interest on credit card transactions. Just make sure you check the terms and conditions.
  • Credit cards can be used to make purchases, transfers and cash withdrawals, both at home and abroad. Just be aware that interest, fees and charges may apply.
  • You can repay as much as you want when you’re able to, or as little as the minimum payment each month. Just be aware that if you only pay the minimum, it’ll take longer and cost you more to clear your credit card balance.
  • Where the total purchase price is over £100 and up to £30,000, credit card purchases will usually be covered by Section 75 of the Consumer Credit Act 1974.
  • Some credit cards offer tailored benefits, such as preferential rates for overseas use, or the opportunity to earn cashback on qualifying card purchases.
  • Using and managing a credit card carefully could, over time, help to improve your credit score.
  • Credit cards offer a number of fraud protection features.

Drawbacks of a credit card:

  • Whether or not you’re accepted, ‘hard’ credit searches could affect your credit score, especially if you make a number of full applications for credit in a short period of time.
  • The cost of flexibility could be higher interest than you might pay on a personal loan.
  • Introductory or promotional offers may carry restrictions, for example, you may be offered 0% on balance transfers for a number of months, but only on transactions made within the first 60 days from account opening.
  • Unlike a personal loan, there’s less structure around your repayments, which could make it harder to budget, especially if you go on to use your credit card to make further transactions.
  • When introductory or promotional interest rates expire, the standard interest rates will apply instead, which may be higher and cost you more. To limit your borrowing costs, try to repay your balance before any offers expire.
  • You could be charged at different interest rates for individual transaction types made with a credit card. Other fees and charges may also apply. To keep your interest costs to a minimum, payments you make will be allocated to balances with the highest interest rates first, and to those which appear on your monthly statement before those which will feature on future statements.
  • Carrying a lot of debt could affect your credit score and your ability to secure further credit in the future.

More about credit cards



Why choose an overdraft?

An arranged overdraft could be useful as a short-term safety net, helping you to manage unexpected costs, or simply tide you over for a few days.

Some banks and building societies will allow you to use an unarranged overdraft, however your credit score could be negatively impacted if you do.

You may be able to apply for an arranged overdraft online, over the phone or in branch. You’ll only pay daily interest if you use it.

Any time you borrow, you’re making a commitment to responsibly manage and repay any debt, as well as any interest, fees and charges which may apply.

Benefits of an arranged overdraft:

  • Essentially a form of credit, arranged overdrafts are available from banks and building societies, on most current accounts, giving you access to a pre-agreed overdraft limit.
  • On some accounts you may have a ‘grace period’, giving you until the end of the day to bring your account back into credit before daily interest charges begin.
  • Try an overdraft calculator to estimate the costs of using an overdraft – try the Lloyds Bank version.
  • Your bank or building society could give you an instant decision on your overdraft application, giving you access to your overdraft straight away.
  • When you use your overdraft, and how quickly you repay anything you borrow, is flexible. Just bear in mind that the longer you carry a debit balance, and the more it increases, the higher your borrowing costs will be.
  • You don’t need to be a homeowner to apply for on an arranged overdraft.
  • Using and managing an arranged overdraft carefully could, over time, improve your credit score.

Drawbacks of an arranged overdraft:

  • Your overdraft limit is likely to be lower than what you could expect to borrow with a credit card or personal loan.
  • The interest rates on an overdraft may be higher than those on a credit card or personal loan, especially for long-term borrowing.
  • Carrying a lot of debt could affect your credit score and your ability to secure further credit in the future.
  • Unlike a personal loan or credit card, there’s no structure around repayments.
  • Purchases made using cash, a debit card or bank transfer won’t be covered by Section 75 of the Consumer Credit Act 1974, unlike some purchases made using a credit card.
  • Your bank or building society could change or cancel your overdraft at any time and may be repayable on demand.

More about overdrafts

 

When managing any form of credit

  • It’s important to make payments on time to avoid extra fees and charges, losing any introductory or promotional interest rates, and to prevent any negative impact to your credit score or record.
  • Repay as much as you can, wherever possible, to reduce your balance and the amount of any interest you pay overall. This could also help you avoid falling into persistent debt. Just be aware that on some forms of borrowing, early repayment charges may apply.

Key points about loans, credit cards and overdrafts

Depending on your credit needs, loans, credit cards and overdrafts all have pros and cons.

  • A personal loan is a structured way to borrow over a fixed term, at either fixed or variable interest rates. At the end of the term, everything will be paid off, as long as you’ve made all required payments.
  • A credit card could be a flexible way to manage your immediate and ongoing credit needs, from making purchases, to consolidating existing debts.
  • An overdraft can be used as a short-term safety net on your current account, rather than a long-term borrowing option.
  • Other borrowing options may better suit your needs. However you choose to borrow, bear in mind that interest, fees and charges may apply.

Where next?

Know where you stand with Lloyds Bank

Sign up for ‘Your Credit Score’ to see your rating with TransUnion. It’s free to check and won’t hurt your credit score.

More about Your Credit Score