Consider a Credit Card Before a Loan

When it comes needing credit for that foreign holiday or redecorating, most of us think of a personal loan. Now, however, the credit card should be considered also, with some card issuers offering credit at interest rates lower than a personal loan.

There are a plethora of credit cards on the market that offer low rate of interest for balance transfers for lifetime of the balance, with some even offering 0% interest for up to one year.

Intelligent Finance, Lloyds TSB and American Express, are just three issuers who offer low rates of interest on balance transfers. These low rates apply until the debt/balance is completely paid off. As many cards can charge an average of 15% interest, cards that offer low lifetime rates have the potential to save you a substantial amount of money depending on how much you owe.

The British Airways American Express card levies interest of 4.9% interest until the debt is paid off, whilst Intelligent Finance charges 4.95%.

Temptingly, Direct Line and Northern Rock offer a loan rate of 5.6% for a personal loan, with Lombard Direct offering 5.8%. However, while these are the cheapest rates on offer very few are offers them as the rate you are charged depends on criteria such as amount borrowed and your credit history, for example. So if you borrow £5,000 with Direct Line, for instance, and have a moderate credit score, the rate can shoot up to 13.9%.

Another advantage a credit card ha s over a personal loan is a card can be paid off any time without penalty. While there is a danger you can allow a card debt to linger, thus accruing more interest, equally you can pay the debt off a soon as you van. A personal loan, however, is a contract to repay the debt over a set period of time.

Paying a loan off early can result in a penalty charge being invoked, usually the equivalent of one months interest.

There are other problems with repaying loans early, with some loans allocating your initial repayments to the interest first and not the capital. For example, if you have made £1,000 in repayments on a £3,000 loan in the fist year, it may only pay off the interest and not made a dent in the capital, which could still leave you a large sum to repay.

Not all credit card deals will suit everyone as personal circumstances and requirements differ, so it pays to shop around and to carry out a little research before committing to a credit agreement.

Alisdair Milton
21/4/06

 

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