Desperate to buy something? Don’t have the cash? We know what it feels like. Whether you’re dealing with an emergency repair or you just don’t have enough to last you till payday, we all need a little help every now and again. And while borrowing money isn’t something you should take lightly, choosing the right way to do it can make things a lot cheaper and easier.
Here’s when it’s better to use a loan, overdraft or credit card.
You’ve probably heard of all three. But let’s face it, how many of us actually know what they’re for? Here’s how loans, credit cards and overdrafts work – and when you should use them.
Loans are for borrowing set amounts of money for set periods of time.
There are lots of different types of loans available. Ever heard of a mortgage, for example? This kind of loan can cover nearly the whole value of a house! Or you may have heard of a personal loan. These typically let you borrow between around £5,000 and £25,000.
Loans are normally for big lump sums, so they tend to come with clear repayment plans. This means you’ll usually pay back the money and interest in set monthly chunks over a number of years.
Ever wished you could keep spending once your bank account hit £0? That’s what an arranged overdraft is for.
An arranged overdraft allows you to go into a negative bank balance. Normally, you can do this by a small amount for free, but once you spend over a certain amount, your bank will start charging you interest.
Once you’ve been approved for an arranged overdraft, it’s easy to dip in and out of, which makes it perfect if you need to go over budget by a small amount every now and again (normally, you’ll be able to borrow up to £1,000 in this way). That said, the interest rates are pretty high – we’re talking between 19% and 40% APR, which means you’ll be charged between 19% and 40% of the amount you borrow over a year. So, you’ll want to avoid relying on your overdraft or going into it by large amounts for long periods of time.
We bet you’ve heard the phrase ‘I’ll just put it on the credit card.’ A credit card is a bank card that allows you to buy things and then pay for them later.
You can spend as much as you need to, up to the card’s limit. The average credit limit in the UK is between £3,000 and £4,000 but this can vary a lot depending on things like your income and credit history – while some limits are as low as £200, high earners could see limits of over £10,000.
If you pay off your full outstanding balance each month, you won’t normally have to pay any interest. This means that credit cards can be good for borrowing for short periods of time. However, if you don’t mind paying interest, you can also use your card to spread out costs over a longer period of time – you’d just have to make a minimum payment each month, which is usually a percentage of what you owe.
Some cards also come with interest-free periods when you first take them out, which means you can avoid paying interest for longer. And some will encourage you to use them by letting you collect rewards each time you make a purchase. This is often in the form of miles or points, but some even offer cashback, allowing you to claim back a percentage of what you’ve purchased in cash. Sounds tempting right?!
Good question! It all depends on what your situation is and what you want the loan for. When you’re choosing between the three, here are some key things to ask yourself.
Are you borrowing because you’ve run out of funds before payday and you need some cash to tide you over? (In which case, an arranged overdraft might be best). Or is it because you’ve got lots of debts and you want to make them easier to manage by bringing them all into one place? (In which case, a loan is probably what you’re after).
Credit cards, overdrafts and loans are all designed for different situations. So, pinpointing exactly what you need them for is the first step to working out which one will be best for you.
Try to work out exactly how much money you need to borrow. Once you have a figure in mind, you’ll be able to rule out some of the options.
Looking to borrow a big lump sum? Then you’re probably looking at a loan, although some credit cards could also work for you.
Looking to borrow a small amount to tide you over for a short time? Then you’re probably in the market for an overdraft (which will usually allow you to borrow up to £1,000) or a credit card (which will have an average limit of £3,000 to £4,000).
Do you know when you’ll be able to pay back the money you’ve borrowed? Or do you want to be able to pay it back whenever?
Overdrafts and credit cards don’t have set end dates, which means they’re a bit more flexible if you’re not sure what’s going on. Just bear in mind that with a credit card, you’ll still need to pay back a set amount every month (normally a percentage of what you owe). And there’s usually a limit on how long you can borrow for without paying interest.
On the other hand, loans are designed to be paid back over a fixed period of time, usually around 1 to 7 years. Spreading out your repayments like this can make them easier to manage. But you’ll also be paying interest for longer, which means you could end up paying more overall.
Ideally, you don’t want to rush into borrowing money without giving yourself enough time to think it over and weigh up all the options. But sometimes, needs must – especially if you’re dealing with an emergency like a broken boiler!
If you’re in a rush, an overdraft could be the perfect solution. Your bank will normally be able to set one up in just a few hours. Alternatively, a loan could be a good option as some will be able to give you the funds in under 24 hours.
In contrast, it will normally take between 7 and 14 days to apply for and receive a credit card. Don’t get us wrong, that’s not exactly a long time. But if you’re desperate, a week or 2 can feel like years!
Just beware: any lender will want to be sure you’re going to be able to pay the money back. So if they’re worried, they may want to do further checks or get more info, which could slow down the process.
Let’s get to the nitty-gritty: Is it better to use an overdraft or loan? Well, that all depends on what you need it for. Here’s when it’s best to use each one.
Okay, but is an overdraft better than a credit card? Well, it depends. In some situations, yes, but in others, not so much. Here’s the lowdown.
Finally, what’s the deal when it comes to credit cards vs loans? Is one better than the other? Here’s a quick summary.
Let’s be honest: if you can afford to use your savings instead of borrowing money, that’s probably going to be best. That way, you’ll avoid paying any interest and you can rest safe in the knowledge that you’ve only spent what you can afford. But this isn’t always going to be possible!
If you do need to borrow money, here’s what really matters: you’re now a total pro when it comes to the benefits of loans, overdrafts and credit cards! So, no matter what your reason is for borrowing, fingers crossed you’ll now know how to do it properly, saving you time and money in the long run.
With that in mind, what are you waiting for? If you’re ready to go ahead, find the right loan for you, compare overdraft bank accounts or browse the best credit cards. Then, enjoy being able to finally buy that thing you’ve been dreaming of!
We all make mistakes when borrowing money. Here’s the most common mistakes you can learn from, and avoid!
If you’re thinking about applying for a loan then don’t just jump right in - read this first and take some time to really consider if it’s the best choice for you.