12 Month Loan or a Credit Card – Which is Better?

12 Month Loan or a Credit Card – Which is Better?

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For many Brits, household finances are tight after a decade-long squeeze on wages during which pay rises have struggled to keep up with inflation. If you need to borrow £3,000 to pay for a new car or to replace a kitchen that you think is well past its best, is it better to take out a 12-month loan or spend it on a credit card?

In this article, the 786 Loans team looks at the advantages and disadvantages of both for borrowers with a less than perfect credit history.

Credit card for a £3,000 purchase

Let’s look at Marbles Credit Card credit builder card. Credit builder cards are popular among borrowers with poor credit histories because it allows them to build up their credit rating over time. The eventual aim of a credit builder card is that a borrower will be able to successfully apply for cards with much lower interest rates.

Most credit builder cards allow a maximum limit of £1,200. The Marbles card’s maximum limit is subject to status so, if you apply for £3,000, you might get it or you might be offered a lower amount.

A credit card limit is the amount of money you’re allowed to spend on your credit card before you make any repayments. The actual amount you have spent on a card – the figure that you see on your credit card statement – is called your “balance”. Every time you make a purchase, your balance moves closer to your limit and every time you pay the money back to your credit card company, your balance moves further away meaning you have more to spend.

The current representative APR on a Marbles Credit Card credit builder account is 29.7%. This means that at least 51% of their borrowers will pay that rate – the remainder will have interest rates which are either higher or lower. The interest rate you pay on a credit card builder product depends on your personal circumstance.

There are many credit cards offering 0% interest on purchases for the first 12 to 18 months that your account is open, however, if you have a bad credit rating, unfortunately, you’ll be unlikely to qualify for these types of accounts.

How much does it cost to pay back a £3,000 purchase on a credit card?

If you pay the £3,000 back before your next billing date, you won’t pay any interest at all. And because you paid back the £3,000, your balance would be zero and your limit still £3,000 meaning you had £3,000 you could spend on your card still.

What if you only make the minimum repayment? Let’s say that you got the 29.7% APR rate and your minimum repayment was 5% of the outstanding balance (subject to a minimum amount of £5). It would take 11 years and 10 months to pay off and cost you £2,210 in interest fees.

If you decided to overpay and pay 10% off your balance every month, it would take 5 years and 1 month to pay off at a cost of £812 in interest.

Stay disciplined

Credit cards are very easy to spend money with. In fact, people are far less careful in general with credit cards than they are with cash. In an American study featured in the Journal of Experimental Psychology: Applied, researchers Priya Raghubir and Joydeep Srivastava discovered that using credit cards reduced the “pain of paying” because your bill would be sent at a later date rather than be charged to you at the point of purchase.

How big is this effect on people’s spending behaviours? When using cash to buy Thanksgiving presents, participants in the study felt comfortable spending $145 while those using credit cards spent $175 – that’s a big difference!

In order to avoid paying interest on the same debt for years and years, it’d be better to apply for a credit card account, spend the £3,000 we mentioned earlier, and then rip the card up never to use it again. How may of us can really say we can do that though? It’s harder than it sounds.

12-month payday loans for a £3,000 purchase

With a loan, it’s different. You agree to borrow a certain amount of money and then pay it back over a set period of time. As soon as you’ve made the last repayment, you’re out of debt because the loan account you have with your lender is closed – permanently.

What about taking out a loan for £3,000 over 12 months? If you took out a £3,000 loan at an interest rate of 99%, you’d pay £1,839.12 in interest over the 12 months with a monthly repayment of £403.26. If you secured a 59% interest rate, the amount you’d pay in interest would drop to £1,042.68 with a monthly repayment of £336.89.

Once you’ve made your £3,000 purchase, the money has gone for good – you can’t make repayments on a loan and then draw back some of those repayments for extra spending. Taking out a loan requires a lot more discipline than taking out a credit card because you know you have 12 repayment dates ahead of you and you know how much each of those repayments are going to be.

With so many different providers of 12-month loans, how do you find out the right one for you if you decide that this is the right financial approach for you to take?

12-month payday loans with 786 Loans

786 Loans is a broker – we don’t lend you the money you want to borrow. We work with a lot of companies – direct lenders – who do and the service we offer to you and to the lenders is to match you up.

Why would you need matching up? Each lender has a different type of borrower they want to work with. They tell us the characteristics and the circumstances of the borrowers they want to lend money to so, when we receive your application, we match you and your lender by examining your circumstances and choosing the most suitable lender for you.

All this takes place in a few seconds after which we show you the very best deal we’ve found. There’s no charge to our service and you’re not obliged to take out any offer one of our lenders makes you.

To start your applications, please click here.