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
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.
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.
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.
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.
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.
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.
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.
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.