Loan Calculator: loan vs credit card

When you need some extra cash, where do you turn? Your two main options are to take out a personal loan or to use your credit card. Here are the advantages and disadvantages of each...

Personal loan

Advantages

• You can apply for the exact amount you need
• The interest rate will be set when you take out the loan
• Not everyone has or wants a credit card – loans can be used for a one off purchase
• Repayments are fixed, so you always know what’s coming
• There will be a set date by which the loan will be paid back and you will be debt free
• Once the loan has been lodged in your account, you can withdraw it in cash form without being charged

Disadvantages

• You will have to apply for the loan
• Having a personal loan and a credit card can complicate your financial situation
• You will have to wait for the money to clear before you make the purchase (although it can be in your account by the next working day)
• If you want to pay the loan faster than the agreed term, you are likely to be charged a fee
• There’s little flexibility. If you can’t afford the repayment one month, your credit rating may suffer

Credit card

Advantages

• You can pay the debt off as quickly as you like
• You can reduce monthly repayments if you need to. As long as you meet the minimum monthly figure, your credit rating won’t suffer
• If you pay the card off within one month you won’t be charged any interest
• It’s less hassle. If you already have a credit card, you don’t have to apply for anything else
• The purchase can be made instantly. You don’t have to wait for the money to clear
• Having all your debts on one card makes them easier to manage

Disadvantages

• Your credit limit may not be enough to fund the purchase
• Interest rates can change (although you will receive notification)
• If you need the money in cash, your credit card provider will usually charge a fee and a higher rate of interest
• You might be tempted to keep borrowing after you have made the purchase, as there was no loan amount agreed other than a credit limit
• Repayments are not fixed, so you may end up taking longer to pay off the loan than you had planned – resulting in more interest