Credit Card Borrowing Versus Loans

If you are looking to borrow money then you may well be considering whether to use your credit card to raise some cash or whether to take out a loan instead. Both of these financing routes can work well if managed correctly but both of them won't suit every individual that needs to borrow money. So, which option will suit you best?

Using a loan to raise money

For many consumers loans are the preferred method of raising finance when they need to. In some cases this is simply based on the fact that they need to raise a lot of money which they may not be able to do on their credit card. In others, people simply prefer the structure and generally lower interest rates that come with this kind of option.

In general terms the APR (Annual Percentage Rate) given with a loan is the rate that shows you the interest that will be charged on your borrowings. The higher the APR, the more you'll have to repay so look for low APRs wherever possible. Usually most loans will have lower interest rates than credit cards -- unless you take advantage of a special credit card deal.

One of the advantages of taking out a loan is that -- if it has fixed repayments/interest -- you'll know exactly what you have to repay every month and how much you'll repay as a whole. No other interest will be added to the sum you originally borrowed. This suits many people as it can help them budget as they can work out exactly how much they will need to make as a repayment. But, unlike credit card borrowings, you don't have much flexibility here and may even be charged an early redemption fee if your try to pay back your loan early.

Using credit cards to raise money

Many people like to raise money on their credit cards because this is quick and simple when you don't need to borrow that much money. With a credit card you can take control of your repayments. As long as you make your minimum repayment every month you can choose how much or how little to repay at any given time so there is more flexibility here.

Credit cards can come with higher APRs than many loans but you can get round this problem by looking for a special deal such as a balance transfer or an introductory special rate. Some deals charge no interest at all and some cut rates -- deals here can last for anything from a couple of months to over a year.

One disadvantage here is that interest will keep being added to the money you borrowed until you repay it -- so, the less you pay back, the more interest will be charged. So, ultimately, you could end up paying interest on your interest charges.

Conclusion

Do look hard at your finances to make sure that you can actually afford to take out a loan or use a credit card to raise cash. Most people will find it useful to work out a monthly budget that takes into account their essential and everyday spending -- this will give you an idea of how much money you have left over to repay financial commitments. Finally, make sure that you ask for quotes here rather than making multiple applications instead. Too many applications in a short period of time looks bad to lenders and can affect your credit score -- you could be turned down for future financing.

Jill Remus is a freelance researcher and writer specialising in consumer, finance and business subjects.

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