Personal Loans as an alternative to Credit Cards

December 3rd, 2007

There is a growing trend in the UK for people to take out personal loans instead of using a credit card. Essentially these are both methods of achieving the same end, borrowing money, and both have advantages and disadvantages.

‘Credit cards have been popular in the UK for many years now, and these cards offer a range of benefits to cardholder, including the ease and convenience of being able to make purchases with plastic, not having to carry cash around, and being able to buy items by phone or online.’

This is of course true but ignores the fact that these benefits can also be achieved through a debit card without the need to borrow money. Yet there are many disadvantages of credit cards, the first of which is that there is a serious risk of spiraling debt as people are either unaware or simply ignore the debt that they are building up. Restrictions placed on credit cards can mean that people who only pay their monthly minimum are in debt for very long periods of time. Those that do not pay the monthly balance in full face potentially large interest rates which is in effect a hidden cost. Similarly the fees and charges for late repayments, missed repayments and exceeding the credit limit can not only be extortionate but are actually being challenged in the high court as illegal.

It would be wrong to suggest that because credit cards have their drawbacks that a personal loan is the better option for everybody. Since loan providers do not allow a minimum payment, instead having fixed monthly payments, there is little flexibility with repayments and monthly repayments can be higher than with credit card repayments. Also, loans are either secured (e.g. on a house) or else have very high interest rates, meaning that consumers with bad credit ratings will have to pay much more to get a loan.

Although the fixed structure of a personal loan can bring some disadvantages it brings many advantages as well. Fixed, structured repayments mean that you know exactly how much you still owe and when the loan period will end. Fixed interest rates and a choice of repayment periods allow you to plan your finances in the long term. One suggestion has been to take out a loan and place it in a bank account and then use a debit card to combine both the advantages of a credit card with the advantages of a personal loan. Lastly, a formal personal loan will usually allow you more credit than a credit card giving greater freedom to the consumer, although this will be based on financial and employment status.

There is no definite answer to the question ‘what is the best way to borrow money, a credit card or personal loan?’ Depending on a consumers credit status and financial situation one will be better than the other. One thing is certain, however, that once the consumer has made the decision to borrow money in one way under no circumstances should they then in fact use both.

This entry was posted on Monday, December 3rd, 2007 at 1:34 pm and is filed under Personal Loans. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

Personal Loans as an alternative to Credit Cards

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