Should I Take Out a Personal Loan, An Overdraft or a Credit Card?
The quick way to answer this dilemma is to ask another question, what is it you are seeking to accomplish?
If the question is should I take out a loan, or use a credit card or overdraft to make a purchase, we need to look at what you are purchasing and it’s cost.
However, first it may be useful to look at each “loan” option and what its purposes are usually used for.
Credit cards are little plastic marvels which allow us to make purchases easily, and without the need to carry around large amounts of cash. There are small and lightweight, and easily carried in our purse or wallets.
Credit cards are a type of credit called revolving credit.
It works like this:
You are given a credit card with an assigned credit limit. The credit limit is the maximum you can spend on the card. You can spend the credit limit in one go for one purchase, or make many purchases.
As you pay down the balance on the credit card, you have access again to what remaining credit you have again till the maximum credit limit.
Periodically, or if you request it of the credit card company, they will raise your credit limit. Usually as long as you use the card responsible and make the payments.
The payments each month on a credit card are a percentage of the balance on the card, usually 2.5% to 3%.
One other advantage of credit cards, which can also be viewed as a possible negative, is that you only have to pay a minimum monthly payment each month, the 2.5 to 3% of the balance.
However, interest rates on credit cards can be high, so if you only pay the minimum monthly payment, it can take you many, many years to pay off the card. And if you are still using the credit card while only paying the minimum payment, you may never get out of debt.
Credit cards are good for most purchases, and especially online purchases. However, some large ticket items, such as a car, you may not have sufficient credit to buy the car, and the interest rates are high on credit cards, making a personal loan, or other car finance, a better option.
Overdrafts are lines of credit that are attached to our bank accounts. These are usually used if we are almost or are out of money in our bank accounts and make a purchase. The overdraft is in place to cover the money spent, and to not be technically overdrawn in our account.
Overdrafts can be used for purchases, and some overdrafts while carrying a fee is not too high if the overdraft is paid back within the set time frame, which is usually when you are next paid.
Unauthorised overdrafts, can get costly. This is where you do not have an overdraft in place, spend more than what is in your account, and the bank pays the overage for you.
The government has limited these fees, but they still are expensive.
Overdrafts are usually thought of for emergencies, and they are not very high, £200, £500, to maybe £1,000. So not a sufficient amount for large purchases.
Personal loans come in many forms, but in the end they are an unsecured loan of varying amounts and terms used by the borrower for what they wish.
You can take out a personal loan for thousands to buy a car, or for a wedding, home improvement, or just a few hundred pounds for a holiday, or other small purchase.
Personal loans can even be used to consolidate other debts/accounts, such as credit cards, catalogues, and other personal loans.
The interest rates on personal loans vary according the lender, the amount of the loan, the term of the loan, and the borrower’s credit score.
Personal loans are good for larger purchases as you can spread out the payments over a longer term than an overdraft, and this makes the loan more affordable. In addition, with a personal loan having a set repayment term, you will know when you will have the loan paid off.
Credit cards if you only make small payments each month, you may not know when the account will be paid off.
Each of these forms of credit has a use and for some a specific purpose. You can use a personal loan for just about anything, as can you a credit card, but one offers a better repayment schedule to reduce the payments.
Credit cards are good for quick and immediate purchases as you don’t have to arrange the loan, and as long as you pay off the balance in a quick manner you are not charged a lot of interest.