Should you take a loan or credit card?

If you have credit card debts, your financial priority – whether it’s a New Year or not – should be paying them off as quickly and as cheaply as possible.

And switching them to a 0% credit card or paying them off with a low-cost loan, are two smart ways to get on the path to financial freedom.

But with personal loan rates at all-time lows, and a raft of cracking credit card deals coming on to the market, which should you choose to do the job?

Both options have pros and cons. That’s why we’ve taken a closer look at the deals available so that you can make the right choice and stop being a borrower (aside from a mortgage if you have one), sooner rather than later.

PROS: Personal loans

If you are considering taking out a personal loan with which to pay off credit card debt, the good news is there’s never been a better time to bag a bargain interest rate.

Loan providers are locked in a price war that has driven rates down to the lowest ever level. Here at MoneySuperMarket, we have a new exclusive deal with the AA for example, which charges just 4.6% (representative) on borrowing between £7,500 and £15,000 - whether you are a member with the AA or not.

The deal, which is only available for seven days starting from Monday, January 13, sits joint market leading with Sainsbury’s Bank which has recently cut rates to 4.6% on its Shopper Standard Loan for the same borrowing amounts. This representative APR applies to loans taken from three to five years, though. If you want to borrow for a shorter period, the APR goes up to 4.7%.

M&S Bank has also slashed rates on its one to five-year Cardholder Loans of between £7,500 and £15,000 to 4.7%. Although, as the name suggests, this is for M&S current account customers only. For new customers, the representative APR is a fixed 4.8%Clydesdale and Yorkshire banks however, have also pegged their personal loan rates down to 4.7% in deals which are available to all.

As long as your credit score qualifies for these deals, you can therefore borrow at well under 5% and enjoy the security of knowing that you will be debt-free at the end of the term of fixed monthly repayments for which you sign up.

CONS: Personal loans

But what if you don’t owe as much as £7,500? Rates on these so-called mid-range loans (from £7,500 to £15,000) are the cheapest on the market – and also tend to be the preferred battleground for lenders vying to top the best buy tables. Rates on loan amounts that fall either side of these upper and lower thresholds are more expensive.

The new M&S rates, for example, are set at 6.1% APR for loans of between £5,000 and £7,499 and at 6.7% APR on between £15,001 and £25,000.

And loans on small amounts, say £2,000, will pay much more at 18.5% APR.

In any of these cases, loans become much less appealing – especially when you can avoid interest altogether by taking out a 0% balance transfer credit card.

PROS: 0% balance transfer cards

If loan rates are looking good at the moment, they are certainly not outshining the deals available on balance transfer cards, which now offer up to an incredible 30 months at 0%.

That’s the interest-free period currently being offered by the Barclaycard Platinum Credit Card with Extended Balance Transfer.

The length of the 0% offer means you get almost two and a half years to pay off your debts without paying a penny in interest. You will, however, have to pay a fee – in this case 2.89% of the balance being transferred.

If you can clear your debts in a shorter timeframe, it makes sense to look at other cards with lower balance transfer fees.

These include the Lloyds Bank Platinum 24 Month Balance Transfer Card and the Bank of Scotland Platinum Credit Card, both of which allow you 24 months at 0% to clear your debts for a fee of 1.5% (both of which are refunded from 3%).

You can pay even less if you can manage with just 12 months to clear your debt balance transfer. The Fluid Low Fee Balance Transfer deal offers 0% for this long for a 0.75% fee.

And Barclaycard offers the same time for a 0.79% fee (refunded from 1.2%) on its Platinum Balance Transfer Card with Low Fee.

CONS: 0% balance transfer cards

Balance transfer fees charged by the card companies behind all the longest 0% deals are not the only disadvantage to using a credit card to pay off your debts.

You also need to bear in mind that you will end up paying the representative APR on the card if you fail to clear your debts in time.

The APR on the Barclaycard Platinum Credit Card is painfully high at 18.9%, while the APRs on the Lloyds and Bank of Scotland cards are not much lower at 17.9%. Bear in mind these APRs are also representative so could even be higher. But running over by just a month or two could cost you a serious amount of money.

And that could happen if you are undisciplined, or really struggling to make ends meet, which is why the fixed repayments required over a fixed time on personal loans are a better way for some people to clear debts.

Balance transfer card providers also limit their top deals to new customers. So anyone with debts on a Barclaycard, for example, will not be able to benefit from the longest 0% deal on the market, regardless of their credit score.

Still unsure?

The summaries below should help you to make a decision if you are still undecided as to whether a credit card or a loan is best for you.

Opt for personal loan if you:

  • Owe more than £7,500
  • Need more than 2.5 years to pay off your debt
  • Can struggle to live within your means
  • Like the security of fixed repayments

Take out a 0% credit card if you:

  • Owe less than £5,000
  • Are disciplined enough to stick to your own repayment plan
  • Can definitely pay your debt off in 24-30 months
  • Want to avoid paying interest altogether

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

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