Should I get a credit card, overdraft or apply for a loan?
If you are wanting to obtain finance, finding the right way to do so for you can make it easier and cheaper to manage.
Most people find that taking a credit card out is efficient, whilst others do not trust themselves to only spend what they can afford and end up in debt with a terrible credit score.
Overdrafts are great for the likes of students since there is no charge placed on Student account with an overdraft attached. However, overdrafts can let you fall into debt if you do not qualify for a 0 interest or no-fee account.
Loans are great for those who need to get a sum of money quickly, whether it be a long-term or short-term loan – this could be an option for you depending on your circumstances.
In this guide, we will be having a look at the advantages and disadvantages of credit cards, overdrafts and loans so that you can see which would work best for you and your financial situation.
What are they?
It is important to know what function each of these three hold as this knowledge may influence which is the best option for you.
A credit card is obtained through a bank. The bank essentially lends you money which you pay back over time. Each month, you will have the option to pay the minimum amount back, which is usually the £5.00 or you can pay back the full statement which is however much you have spent on the card that month. Some banks allow you to customise how much you pay back in between these amounts.
For example, say you owe £150 at the end of the billing month, but you can only realistically afford to pay back £100 of that – you can do so, but this is not advised as it can damage your credit score.
An overdraft is something which is attached to your current account. It basically lets you borrow a money from your own bank account. The amount will show up as a negative balance.
For example, if you had a balance of £10 and you spent £20, your new balance would be -£10. This way your card will not get rejected but you are technically borrowing for yourself. So, if you cleared a cheque into your bank account which was for £30, your new balance would be £20. £10 of the cheque would go into paying yourself back for the money you borrowed from your own bank account.
Loans are an extremely traditional way of obtaining money when it is needed. Essentially, a loan is where you borrow a sum of money and then pay back the money in regular instalments and with interest attached.
As for loans, there are so many different types such as; a payday loan, a business loan and a guarantor loan. If you are wanting to take out a loan, make sure you do your research into which type would suit you best or even which type you would qualify for.
How quickly do you need the money?
When dwelling on which kind of finance to take out, one of the things you need to ask yourself is “how quickly do I need the money?”
If you are in need of the money quickly, then an overdraft or a loan could be your best bet. Plenty of loan applications are approved within 24 hours, and the money will be deposited in this time as well. An overdraft can be added to your current bank account in a matter of hours, and you will only owe yourself the money.
If you are not in desperate need of money but know you need some soon then you could opt for a credit card. They are usually sent you within 7-10 working days from the date of your application.
How much are you wanting to borrow?
The amount of money which you are wanting to borrow is also a factor to consider. If you are wanting to obtain a large lump sum of money, the best option probably a loan.
With a personal loan, you are usually entitled to an amount ranging from £1,000 to £25,000 if you meet the criteria set out by the lender. If you go for a homeowner/secured loan, you will be entitled to take out a much larger amount.
Credit card limits start at just a few hundred pounds but can reach over the £10,000 mark. Bear in mind that you will not know how much you can borrow up front as your credit card limit is based on your personal circumstances rather than you asking for a particular amount of money.
Overdrafts can usually only offer you up to £1,000 to overdraw. If you have a higher income, this limit can be a lot higher. If you want to borrow small amounts of money, an overdraft is a good option. Again, the overdraft limit is based on your personal circumstances so you will not know how much you are entitled to in the initial stages of the application.