Are there situations when it actually makes more sense to go for a short-term loan rather than a credit card? Of course, the answer isn’t always clear-cut and there are a lot of factors on how a person would use either a short-term loan or a credit card that you’d need to consider before you came up with a definitive answer.
Let’s look at the average emergency situation that tens of thousands of Brits face each year where you might be unsure whether to choose a short-term loan or a credit card.
As you know, short-term loans are designed for emergency situations when a bill you weren’t expecting to have to pay suddenly appears and you have to do something about it quickly. Let’s say that the thermostat goes on your boiler and it’s going to cost you £180 for a replacement part and £70 for the engineer to fit the new thermostat.
You need £250. Do you go short-term loan or do you go credit card?
It’s going to cost £250 all-in to replace the thermostat in your boiler including parts and labour. We all know how cold British winters get and it’s no fun sitting in a house that feels colder inside than it does outside. The engineer is coming around in a couple of hours and you need to pay her.
How fast can you get £250?
If you choose a short-term loan or a payday loan to raise the money you need to pay the engineer, is it possible to apply for one of these loans and get the money before the engineer comes around?
Yes and no – it depends on how you do it.
There are hundreds of short-term lenders and payday lenders in the UK. You can apply directly to nearly all of them via their website or by making a phone call. It takes around 10 minutes to make the application and most lenders are able to transfer the money to your account within 15 minutes of your signing the online paperwork (some bank accounts may not accept payments that quickly, however).
You could theoretically make 10 applications to payday loan and short-term loans companies in those two hours and that would leave you another 20 minutes for the money to be paid directly into your current account.
However, there’s a problem doing it this way. Lenders don’t like it when you make multiple applications to different companies – it makes you look like you’re desperate for money. That might sound unfair but that’s just the way they view it.
Each payday loan provider and short-term loan provider has their own “borrower profile” – that’s a set of criteria they prefer to see in potential borrowers and their personal circumstances. The problem for borrowers who apply directly to lenders is that they don’t know what a lender’s borrower profile is because it’s never explained on their website.
You could make 10 applications to 10 different lenders putting down exactly the same information on each application form – 3 might say “yes” and 7 might say “no”. But because you don’t know what they’re looking for in a borrower, how do you know which companies to approach?
In this case, a broker like Loan Princess is better. A broker doesn’t give you a loan – what a broker does is to introduce you to lenders whose borrower profile you’re closest to. Lenders share their borrower profile details with brokers like Loan Princess meaning that, when you’ve given us your details on the application form, our computer system starts to match you and your life to the closest borrower profiles.
It’s all done in seconds. Once we’ve found the right lenders, we then contact them all. We send them the details you gave us on your application form together with a copy of your credit report. We might find 8 lenders whose borrower profile you closely match. Instead of those 8 lenders each doing their own credit search, we do one credit search and we send it to the lenders to help them make their decision.
With a minute or so, we select the very best offer for you, tell you everything you need to know about the loan (including loan length, interest rates, what you’ll be paying back, and when), and then it’s up to you. If you want to take the loan out, simply agree to the terms and conditions. If you don’t, no problem – you’re in charge all the time. Whatever you decide, neither Loan Princess nor the companies we introduce you charge you a fee for arranging the loan.
By using a broker, it’s possible to get the money you need to pay your engineer in just a few minutes.
What about a credit card? If you have one already and there’s at least £250 left on it, you already have access to the cash.
If you don’t have a credit card, it can take up to a week after you apply to get your credit card through the post so, for this particular situation, a credit card wouldn’t be of any help.
Will the person or company I’m paying £250 to accept a credit card?
Does your heating engineer accept credit cards? Will she expect to be paid in cash? More and more tradespeople are happy to be paid by debit or credit card but it’s far from universal just yet.
If she does not accept credit cards, there are two ways you can draw down cash from your credit card account. You can arrange a money transfer by using your credit card company’s app or website. This allows you to transfer cash directly into your bank account instantly – some providers make a charge for this and others don’t. You can then withdraw the cash directly at a hole-in-the-wall to pay the engineer.
The other way is by going to a cashpoint and withdrawing it as cash. There are significant charges associated with doing this – sometimes up to 6% which, on a withdrawal of £250, would cost you £15.
Will the person or company I’m paying £250 to accept cash?
If your engineer accepts credit cards, she’ll also accept debit cards. That means that, when the time comes to pay, she can just swipe your card through her terminal to receive payment. As your payday loan or short-term loan is paid directly into your bank account, you’ll be able to make payment by debit card.
If she doesn’t, you can visit the cashpoint and withdraw the amount of your new payday loan or short-term loan without the charges associated with either a credit card money transfer or withdrawing cash directly from an ATM with your credit card.
How long will it take me to pay the £250 back?
With a credit card, you can either;
• pay the balance off in full straight away and not pay any interest on the £250,
• make the minimum repayment, or
• pay off a nominated cash amount or percentage every month.
Let’s look at the second option – making the minimum repayment. If you had a Barclaycard and you chose just to make the minimum repayment, you’d have to pay either the greater of 1% of the balance plus interest, 2.25% of the balance, or £5 every month.
If you only ever made the minimum repayment, it would take 7 years and 1 month to pay back and you’d pay £187 in interest over that time.
A short-term loan is different because there’s an end date to it which you and your lender know in advance.
If you chose a payday loan, the most you could legally be charged in interest assuming that you paid the loan back 30 days after taking it out is £60 (30 days interest at 0.8% or £2 a day). That’s £127 less than just making the minimum repayment on your Barclaycard.
If you took out a short-term loan over three months at the maximum interest rate that can be charged by payday or short-term lenders, you’d pay back £126.73 in interest – just over £70 less than making the minimum repayment.
If you take out your short-term loan over a period longer than 5 or 6 months, depending on who the lender is, the interest you pay on that short-term loan may actually be higher than the interest you pay on a credit card only making the minimum repayment.
Every lender is different so that’s not always the case though. Later on in this article, find out how Loan Princess works hard to get you the cheapest loan deal on the market. Alternatively, click here if you want to apply now.
What’s more likely to tempt me to spend more money?
With a credit card, you have a limit that you can spend up to. If you have a limit of £5,000 and a balance of £1,000 (your balance is the amount you owe that you haven’t paid back yet), there’s plenty of room for you to pay your engineer £250.
However, there’d be thousands of pounds left on your card that you could choose to spend if you wanted to. And we’ve all read the stories about how people can run up enormous credit card debts that take years to pay back costing thousands of pounds in interest. For many people, credit cards are too much of a temptation because they make spending so easy.
With a short-term loan, you ask for an amount and that’s all you get. You have a limited time in which to pay the loan and the interest off and when you’ve made the final repayment, the loan is gone. Your loan is settled and you’re no longer in debt.
Short term loans versus credit cards – the verdict
Every situation is different so you’ve got to be clear in your own mind about whether using a credit card or a short-term loan to pay off emergency expenses is better for you.
Short-term loans seem to cost less you in interest if they’re taken out over 5 months or less compared to if you take out money on your credit card and only ever pay off the minimum repayment amount each month.
On the other hand, the amount you pay each month by only paying the minimum repayment amount is much less than a short-term loan. Better still, if you can pay off the credit card balance all in one go, you won’t pay any interest at all.
There are a few things that are true for both short-term loans and credit cards though. You should never take out more than you can afford and you should always make sure you can afford the monthly repayments.
Short term loans and credit cards should only be used for emergency expenditure like a car breaking down, funeral expenses, medical costs, and so on.
The cheapest short-term loans are available to you through Loan Princess
Let our computer quickly match you with short-term loan companies looking to work with borrowers like you. All you have to do is to fill in our application form and, then, a few seconds later, one or more of the lenders we approach on your behalf may come back with an offer.
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