Loans vs Credit Cards | allthelenders
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Loans vs Credit Cards

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When it comes to accessing credit, there are generally two ways to do so: credit cards or loans. While each offers plenty of benefits, and a range of different capabilities, finding out which one is right for you might take a little more insight and research. While it’s easy to consider both types of credit as the same thing, there are some key differences between the average credit card and your typical loan that can make all the difference in the long run.

So, when it comes to loans vs credit cards, which is the best option for you? Well, that depends. Read on to find out more about taking out a loan over applying for a credit card. From the advantages and disadvantages to the differences between the two, we cover it all. If you want to make an informed decision on the type of credit that’s right for you, we’ve got the details to get you started. Find out more now:

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What are loans and credit cards?

The first step to understanding which type of credit is best for you is understanding what credit cards and loans are. While at their most basic, loans and credit cards are both forms of credit, there are several distinct differences between how they operate and the way they work. Armed with that information, figuring out whether a loan over a credit card is right for you is a far easier process.

What is a loan?

A loan is typically a longer-term form of credit. In the majority of circumstances, loans are paid over a set period. They have interest from the start of your payment period, which is defined in the terms when you sign up for that specific loan. Once you’ve paid off a loan, it’s gone – you can’t use it as a continual form of credit. Because of this, loans are typically used to pay off a specific thing. Car finance and mortgages are a form of loan to pay off your vehicle or your house. More generic loans still work along these same lines, offering money to pay for something which you can then pay back.

While short-term loans are available, they work in the same way as longer-term loans as opposed to other forms of credit. That means there’s still a set amount to pay each month, a specific, pre-determined amount of interest across payments and you get access to the exact amount of money you’ve asked for. Some loans may allow you to pay them off early, while others will charge extra to do so – that all depends on the loan itself.

What is a credit card?

A credit card is, in its simplest form, a kind of continuous credit that you gain access to when you sign up to specific credit card company. You’re provided with an account and a limit that you can spend up to, with a fixed rate of interest that’s applied every month on your specific balance. Credit cards differ from loans in that you are applying to access continual lending. So, if you were to spend £1,000 on your credit card, and then pay it off, you’d once more have £1,000 to use.

Credit cards are typically used for everyday purchases, though they may be used for larger purchases that take longer to pay off in some cases. As a more short-term form of credit, users should still make set payments each month to reduce their balance. But the rules aren’t quite so rigid as they would be for a loan. Depending on your specific circumstances, credit cards can allow quick and easy access to credit without a hugely formal process – especially if you’ve already applied and been approved for a card at an earlier date.

What’s the advantage of loans over a credit card?

If you’re planning on making a large purchase - or spending a large amount of money - that you’d like to pay back over a relatively long amount of time, then a loan is an excellent credit option. Whether you’re replacing broken appliances or carrying out renovations, loans offer a way to pay off that sizeable up-front payment bit by bit under set terms. They make big purchases affordable by breaking them down into smaller chunks and are a great option if it’s a one-off large amount of money you want to borrow.

Having a fixed interest is also helpful in knowing how much you need to pay exactly. Often, people take out credit cards with 0% interest with the intention to pay them off quickly. But if that large payment isn’t covered, a high amount of interest they aren’t expecting will soon start piling up. There’s no such issue with loans, where what you see is what you get in terms of payment.

Are there any disadvantages to a loan instead of a credit card?

If you want a form of credit you can use on the fly – for food or clothes shopping, for example – then a loan likely isn’t the best fit. Loans are designed for large payments in one go, which means they’re not best suited if you generally want to use credit or build up your credit rating. Loans simply aren’t designed to cover little and often use, and that puts them at a disadvantage versus credit cards in those specific circumstances.

It’s also worth mentioning that credit cards can be paid variably. That means you can throw a large amount of money at your balance one month if you have the funds available, and pay less the month after. This flexibility is a benefit of credit cards, while loans require a fixed payment each month. However, it does take proper management and financial judgement to pay off credit manually – as opposed to the automatic direct debits often used for loan payments.

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Which option is the right fit for me?

There’s no one answer to which type of credit is best for you. If you’re planning on larger, one-off or long-term purchases, then a loan is a great fit. But for building your credit rating and spending little and often, a credit card may be best for you. By knowing what you want to use credit for, you’ll be far better placed to pick the choice that suits you best. Once you have that information, finding the best option for you is easy.