Should you take a credit card or a loan?

There’s a whole host of reasons why you might be looking to borrow.  It could be that you need to make a large purchase, fund an emergency repair or even consolidate various existing debt into one lump on which you pay a lower interest rate. In any of these cases, your first instinct may well be to take out a loan. But, in some instances, borrowing on a credit card can be a more cost effective option.

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Personal loan offerings

Marks & Spencer is top of the best-buy personal loan tables, offering a representative APR of 6.0%, while Tesco and Sainsbury’s fall a closely behind with representative APRs of 6.1%.

However, as eye-catching as these low-interest rates might be, they are only offered on loans of between £7,500 and £14,999. Borrow less than this and you will usually pay upwards of 10% interest every year.

So, given that many credit cards come with interest-free repayment periods, isn’t is better to borrow on plastic instead?

The best 0% purchase credit cards

There is a raft of credit cards available with initial interest-free periods on purchases, so if you get one of these you can spread the cost of your borrowing without paying a penny in interest.

The current market leaders for interest-free purchase deals are Nationwide’s Select Card and the British Airways American Express Premium Plus Card, both of which offer a duration of 18 months.

However, to take advantage of the Nationwide Select card you need to hold a FlexAccount with the building society, while the British Airways card comes with an annual fee of £150, which pushes the representative APR up to an eye-watering 50.1%.

The next best option is the Marks & Spencer Credit Card which offers 15 months interest-free on purchases and has a representative APR of 15.9% (variable) after this period.

Advantages of credit cards over loans

There are further advantages of credit cards too. When you make a purchase on a credit card you are protected under section 75 of the Consumer Credit Act. This entitles you to make a compensation claim against your credit card provider if the goods are lost, damaged or faulty as it becomes jointly liable with the retailer.

The Consumer Credit Act covers you for purchases costing between £100 and £30,000 while the more recently-introduced Consumer Credit Directive offers protection on items that cost between £30,000 and £60,260. You are covered for the full cost of the item, even if you pay just a part of it, such as a deposit, with your credit card.

Loans do not come with this type of protection.

If the amount you want to borrow is small, even if you do pay interest on your credit card, it could still be lower than interest charged on a loan. This is because rates on loans rocket for small borrowing so lenders can maximise their returns.

If you are looking to borrow £1,500 over a two-year period for example, then the best representative APR you’ll get is 18.6% from Sainsbury’s Finance, while the interest on the Marks & Spencer credit card, that kicks in after 15 months is a representative 15.9% (variable).

Nevertheless, you should always try to pay off any credit card balance in full before the end of the interest-free period.

Advantages of loans over credit cards

On the flip side however, borrowing on a credit card means you do not know the exact amount you will be offered and, if you require a specific amount – to fund the purchase of a new car for example – you could find that your credit limit falls short.

Another problem with credit cards is that, as they only require you make minimum interest payments each month, you will need to be disciplined to clear the debt yourself before the 0% period expires.

This isn’t an issue with a personal loan as you apply for the exact amount you need and then repay the interest and the capital over the agreed term, making managing the debt pretty straightforward.

You may have the option to clear the debt early with a loan, as you would with a credit card, but always check the terms of the agreement first. Not all loans are flexible and you could be charged a penalty fee for early redemption.

Final word

Regardless of whether you opt for a loan or a credit card for your borrowing needs, it’s important to shop around and make sure you get the best deal for your circumstances. It is also vital that you keep up with your repayments as being late or defaulting can have a negative effect on your credit report, which can lead to problems obtaining credit in the future.

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.We’re free, independent and compare all UK credit cards, as well as offering exclusive deals you can’t get anywhere else. Contact MoneySupermarket.com at Moneysupermarket House, St David’s Park, Ewloe, Flintshire, CH5 3UZ. © Moneysupermarket.com Ltd 2011.

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