Small loans and credit cards are both popular options amongst those looking for additional finances, but which option is best? The option you choose will largely depend on your personal financial situation, however, comparing them both will give you all the facts you need in order to make that all important decision.
If you've ever asked yourself 'what are small loans?' or you've pondered 'is it better to get a credit card?', we'll answer these questions and many more in this small loans vs credit cards guide. Read on to discover which option could be the ideal financial solution for you.
What are Small Loans?
Small loans are exactly as they sound; they are personal loans of small amounts of money, usually no more than £500, which are then paid off regularly as part of a repayment plan with the lender.
They are exactly the same as payday loans, whereby the money is usually borrowed on a short-term basis and repaid on the borrower's next payday. Some lenders offer longer repayment periods of 6 months or even over a year, however, this is a more expensive option due to the added interest.
When you apply for a small loan, the lender will look at your credit file and history before deciding whether to lend to you. Even though lenders perform a credit check, in many cases you do not need a perfect credit record to obtain one of these loans, as there are a number of providers on the market who provide specific personal loans for people with poor credit histories. If you're unsure of how to get a small loan with bad credit, perform a quick Google search to see which lenders offer this option and compare them to find the best interest rates.
Small loans are a useful option if you're strapped for cash in an emergency, or for short-term cash flow problems. Most lenders can send the money to your account within hours of your application being accepted, and you know exactly how much interest you'll pay. Despite this, it's important to note that small loans providers usually charge higher interest rates, so borrowing in this way may cost more than taking out a standard loan.
Small Loans vs Secured Loans
There are two main types of loan that you can get, these are secured loans and unsecured loans. Unsecured loans, also known as personal loans, are not secured against any of your assets, therefore lenders can't repossess your home or take any of your possessions to pay off the debt if you can't afford your repayments. To lenders, providing unsecured loans is a more risky option, therefore they tend to have higher interest rates than secured loans.
On the other hand, secured loans are secured against significant assets such as your car or house. This means that if you can't keep up with your repayments, the bank will be able to repossess your house and sell it in order to cover the amount owed.
As a borrower, unsecured loans are a more suitable option as they are less risky and you won't lose your home if you can't pay off your debt, however, they can be more expensive as a result.
What are Credit Cards?
Most people are already aware of credit cards and their uses, but how do they differ from small loans?
A credit card is technically another type of loan, however, in this instance the money is borrowed from your credit card provider rather than it being debited from your personal bank account. As well as this, you'll get an allowance or credit card limit from your lender, and you'll get charged interest on whatever you spend unless the credit card balance is paid off in full every month.
Loans differ from credit cards because they are paid off via a structured repayment plan, and therefore you pay a set amount per month until the debt is cleared. This is known as the 'repayment period', and you'll always know how much time you have to pay off your loan before you take it out.
However, with credit cards there is no fixed repayment period. Instead, credit card companies send out monthly statements listing the payments made, amount owed, the minimum payment required and when it's due.
Credit cards usually have an interest-free period of at least 56-days, meaning that you can borrow for nothing if you clear the debt within this time. After this point, you'll be charged interest on your purchases, so it's best to get clear the balance within the interest-free period to avoid paying additional fees.
Advantages and Disadvantages of Small Loans
There are several pros and cons to getting a small loan. Some of the main advantages are that:
- They are unsecured - You don't have to worry about losing your home if you can't make repayments.
- You can get a small loan with bad credit - As mentioned earlier, there are several lenders who specialise in providing loans for people with bad credit. However, don't forget that making too many applications within a short period of time can damage your credit score even further. To avoid this, compare your options and only apply for the best deal.
- They can be used for anything - As soon as you receive the money from the lender, it can be used for whatever you wish.
Despite this, small loans also come with their downsides. These are:
- They are expensive - Small loans typically have higher interest rates than credit cards and therefore can be more costly.
- No part-payments - You can't pay any less than the set amount for the duration of the repayment period.
- More restrictions for those with bad credit - If you have a low credit score, lenders see you as more of a 'risk', so impose more restrictions to try and offset this risk.
Advantages and Disadvantages of Credit Cards
Some of the main advantages of getting a credit card include:
- They can be used to build up your credit score - If you pay off your credit card in full every month, this will count as a positive on your credit file and will help you to improve your score.
- Purchase protection - Credit cards offer more protection than debit cards, therefore if you receive a faulty or damaged product, you can claim the money back from your credit card provider.
Whereas some of the cons of this borrowing method includes:
- Interest - Unless you pay your bill in full every month, you will need to pay interest on your purchases and you could end up in even more debt if it's not managed well.
- Hidden fees - Some credit card providers will charge you to withdraw money from a cash machine and charge you for late payments too. Always remember to check the full terms and conditions to see if there are any hidden fees to be mindful of.
There are a range of factors to take into account when deciding whether to get a credit card or small loan. Evaluate whether you need the money first, and explore other sources of finance before making the decision to borrow. This will help you to save money and stay on top of your finances.