Credit Versus Loans

Knowing which way to borrow money depends largely on your circumstances and what you need to borrow for. For small amounts that you intend to pay back quickly, a credit card is, broadly speaking, the best way to go. But the loans market is highly flexible, with many finance companies and banks offering small personal loans designed for minor home improvements or a specific purchase (try personal loans from Santander for competitive rates).

Beyond those broad brush strokes, there are some key points to keep in mind when thinking about what kind of borrowing you should undertake. Let’s take a look at the main types of loan products, and which scenarios they are most suited to.

In terms of the level of commitment, a fixed-rate loan is basically a second mortgage. You borrow a set amount and pay it back over anything from 5 to 30 years. The repayments are fixed monthly instalments. For large home improvements, to start a business, or anything else for which you need a large lump sum in one go, a fixed-rate loan is usually the way to go.

Of course, this doesn’t give you the flexibility of a credit card or line of credit, where you can tap funds at will, up to a certain limit. Simply by writing a check or using your card, you can borrow any amount within the limit, at any time. Payback is flexible, providing you pay back a small monthly minimum. You will only pay interest on what you borrow. Credit is perfect for small, irregular financial commitments for which you need to temporarily borrow money, often at short notice. It’s also ideal for making online purchases which often can’t be paid for using a debit card.

A credit card is generally better for smaller amounts, as traditional lenders are usually seeking to loan you as big a sum as possible, with discounts kicking in the larger the amount. If you’re comparing different loans, include the interest in all your calculations, as the difference in repayments can be huge. The aforementioned Santander offer some of the best value personal loans on the market, with typical APRs of around 8.9%. A number of lenders won’t even advertise their typical rates, which should always set alarm bells ringing. Banks will set your APR depending on the size of the loan and your credit history. If you have a good repayment record, you can expect a favourable rate. Above all, research the market thoroughly and keep asking yourself what you need the money for, and how much do you really need.

This post brought to you by Santander.


Image: Michelle Meiklejohn  FreeDigitalPhotos.net

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