Could a credit card now be cheaper than a loan?

By Helen Gradwell

In the past, personal loans have been preferred over credit cards for long-term borrowing. This is because, over a long period, credit cards could traditionally cost you a lot more in interest.

Things have changed, however, according to an article on AOL Money. With many credit cards now offering 0% over lengthy periods, some people are wondering whether credit cards could be the best option.

It is true, however, that personal loans have been getting cheaper. Several lenders are offering loans at rates of around 6% at the moment. This, however, is dependent upon you having a good credit rating. If you want to borrow less than around £7,500, the interest rates get less competitive.

If you have a 'poor' credit rating, according to moneysupermarket.com, you could see your loan either secured at 12.5% or jump to 62.1% unsecured, to give two examples.

Many credit cards are now offering up to 22 months interest-free on balance transfers. You may need to pay a fee to transfer your money, though, and there is a minimum monthly payment. However, it is usually still cheaper than paying loan interest.

This means that, on the whole, if you need a loan to be repaid in under two years and for less than £7,500 - it is pretty likely that you'll get a better deal with a credit card. For example, if you borrowed £5,000 with a 3% balance transfer fee, you would only pay £150. With a credit card, you can choose to pay your balance off more quickly without having to pay a penalty.

The Commercial Development Manager of Freedom Finance, Stephen Green, has a warning, however. He urges people to "know exactly what you're signing up for from the start".

He added: "Low-interest credit cards do serve a purpose for those disciplined enough to always make their monthly repayments and those who have undertaken the financial planning to ensure paying off any remaining balance when the low rate period comes to an end.

"Anyone who is unable to meet these requirements should resist the magic 0% credit card as the chances are this will eventually end in increased debts, higher payments and a poor credit rating. In many cases loans may be more suitable, with consumers able to agree to a rate from the start and commit to regular payments via direct debit with the confidence that they will clear the debt at the end of the term of the loan."

Image © iStockPhotos / Peter kizilkayaphotos

Tags: credit cards, loans, interest rates, debt, personal loans, AOL Money, moneysupermarket

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