Don’t you hate it how the fridge chooses to break down and need replacing just when money becomes tight?  Murphy’s law seems to dictate that you will need to replace an important appliance or make a large purchase just when you can least afford it.   It is usually the most expensive or essential things thatloan choose that time to need replacing- like the central heating boiler or a new car to get to work. If you are like 70%  of people in the UK who haven’t saved enough money to cover large unexpected expenses, what is the best way to finance large purchases like these?  Should you make expensive purchases using a loan or credit card? What about utilising overdraft instead of taking out a loan?

Personal Loans, Credit Cards and Overdrafts - What is the best option?

Learning Highlights
  • Learn about different loan options
  • The best ways to borrow money from the quickest to the cheapest
  • The disadvantages of overdrafts and the differences between overdrafts and loans
  • Which is easier to get with bad credit: line of credit loan or a personal loan
  • Loan or credit card: The hidden costs when you need cash
  • Is it worth the risk to borrow money at no interest using a 0% credit card or interest-free overdraft

What are the Best Loan Options?


In the past, your only option was a bank loan. In the 21st century, however, there are many loan options available to borrow money for the long or short term. Besides for the typical unsecured loan, you can also borrow money unintentionally by using your overdraft or maxing out your credit card.

Should you take out a loan or use your credit card or overdraft facility? That depends on whether you are looking for the cheapest way to borrow money or the quickest way. The best loan option for you might also depend on the amount you want to borrow and for how long. compared loans, overdrafts and different types of credit cards – so you should read on to find out the best way to get credit.

credit card vs loan vs overdraft- which is the best loan option for you? - compares loans to credit cards, credit line and overdrafts,

Understanding the benefits and drawbacks of each of these three methods of borrowing will help you work out which loan option is the best and cheapest for your current financial circumstances.


What is better: loan or overdraft?

Overdraft is another type of loan that people use to borrow money for a short time. If you want to use an overdraft as a loan to borrow small amounts of money, it is a good idea to arrange an overdraft facility first. By using an arranged overdraft facility as opposed to an unauthorised overdraft facility, you will avoid paying high-interest fees on overdrafts. Otherwise, if you spend more money than you have in your current account, the bank will lend you the difference yet charges a high-interest rate for the unarranged overdraft loan.

Most major banks will grant an overdraft arrangement if you have a current account. It might be worthwhile to see if your bank offers interest-free overdraft facilities as it will mean another way to borrow interest free – up to a certain amount.

Before using an overdraft, it is important to check what the current rate of interest is for your bank. It becomes clear that if you need only a small amount for a short time, then an overdraft is a useful option instead of a loan which will run for a longer period and cost you more in interest.

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Disadvantages of Overdraft

  • Continually maxing out your overdraft facility will affect your credit rating and thus  your ability to borrow in the future.
  • Also, the bank has the right to terminate the agreed overdraft amount whenever they want.
  • They can also demand immediate repayment of all the money you have borrowed. It could cause real problems when you have already spent the funds.

The differences between overdrafts and loans

Overdraft Loan
How much can I get? Banks loan small amounts – up to £1,000 Can get a large amount from £2,500 – £25, 000
What are the interest rates? Higher interest rate than a loan Lower interest rate than overdraft
How soon do I have to repay? Bank can demand immediate repayment of all the money you have borrowed. It could cause real problems when you have already spent the funds. Banks cannot demand you repay in full before the end of the loan period unless there are extenuating circumstances.
How are monthly repayments worked out? Monthly payments vary due to flexible borrowing and variable interest. Fixed monthly payments allow for better budgeting.
How long can I borrow for? Although banks can withdraw overdraft facilities at any time and ask for immediate repayment, technically you can use overdraft facilities for as long as you want, from a few hours to a few years. It is a cheap loan option if you only need money for a short time. However, in the long term, interest makes this option less worthwhile. You have as long as you want to pay back a personal loan – from 3 months or 10 years. Works out cheaper if you need money now but need a while to pay back.
What if I go over the limit? If you spend more than your overdraft limit, you will need to pay the high interest and fees of an unarranged overdraft. As the loan is for a fixed amount, you are unable to spend more than allocated, so there is no extra interest.
What do I pay interest on? You pay interest on the amount of the credit line you use You pay interest on the total amount you borrow


Of course, overdraft rates are very high compared to loans rates. This is because an overdraft is only designed to use for short term borrowing.

Before using an overdraft, it is important to check what the current rate of interest is for your bank. It becomes clear that if you need only a small amount for a short time, then an overdraft is a useful option instead of a loan which will run for a longer period and cost you more in interest.

Loan vs Overdraft: Which is the better way to borrow money?

“Overdrafts are good if you want to borrow a small amount of money for a short amount of time, while it is better to take out a loan if you want to borrow higher amounts of money for a longer amount of time at a lower rate.”


If you want to borrow a substantial amount of money for a large purchase, then a personal loan offers better options than an overdraft. You will not be put under pressure to pay it off early. You will be fully aware of the total cost of the loan and how much you must pay each month. This helps to facilitate a monthly household budget.

In addition, as long as you keep strictly to the terms of the agreement, then the finance company or bank cannot demand the immediate repayment of the loan in full. There is also the matter of the rate of interest. Overdrafts rates may go up (or down) following bank base rate changes. But, a fixed-rate loan will remain the same until the end of the term.

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Let us compare loans to overdraft by way of example. Let’s say you are having money problems and need to spend £1,000 more then what you have in your bank account. Would an overdraft work out cheaper than a loan?

If you use an overdraft as a loan, yet cannot pay back the debt until three months have passed, you will paying £86.73 in interest and fees using the arranged overdraft provided by a lender like Nationwide Building Society.1. If you had known in advance that it would take 3 months to recover from the financial setback, you probably should have taken out a cheaper personal loan. With lower interest rates, Personal loans work out cheaper than overdraft loan facilities if you need a loan for longer than a few months.
However, if you are able to pay back the debt soon and thus only need assistance for the short term, then using an arranged overdraft as a loan for just a month will work out cheaper than taking out a loan for the same period.

That only applies if you were able to arrange overdraft facilities in advance and spent within your overdraft limit. Many lenders charge a daily fee if you use unarranged overdraft facilities. NatWest 2, for example, charges £8 a day until you settle your debt. Even though they won’t charge you more than £80 a month, personal loans are still cheaper than an unarranged overdraft.

Unarranged overdrafts can give you instant access to money to pay for emergencies,  such as a central heating repair, a leaking roof repair or to fix a broken-down vehicle. However, if you wait just a bit longer, you can get a quick loan online and pay less interest.


What is better a loan or line of credit?

What is a Credit Line Loan?

A credit line loan is when a bank agrees to lend you a certain amount of money, yet you can choose how much of the money you want to use and when to use it. Interest is paid on the amount borrowed, so monthly payments vary.

Many banks offer a credit line to their customers who have good credit. A personal line of credit is just the  maximum amount one can borrow without having to apply for a new loan. In fact, people can borrow and repay, borrow and repay using the same loan terms throughout the loan period. Although the open line of credit makes funds available, people can choose whether they want to borrow the money or not. The loan resembles a credit card in the way that you only pay interest on the amount you actually use and not the entire value of the money available. The interest on the amount borrowed is calculated and paid every month on or by the due date. You have to repay the loan by the end of the term.

The difference between line of credit and personal loans

The core difference between a line of credit and a personal loan is how you receive the money. With a  loan, you apply for a fixed amount which you get in a lump sum while with a credit line you get a  credit line limit which allows you to borrow money as you need it up to the set limit. Furthermore, With a line of credit loan, you only pay interest on the amount of the credit line you use, as opposed to a loan in which you pay interest on the entire amount.  However, the line of credit  loan still has higher interest rates than an unsecured loan.

Line of Credit Loan
Can I get with bad credit? Need good credit to get a credit line Easier to get a loan with bad credit
Are there any fees? High upfront fees yet only start to pay interest when you use the money Fewer Upfront fees, yet start paying interest from the moment you receive money
What do you pay interest on? You only pay interest on the amount of the credit line you use You pay interest on the total amount you borrow


Should you get a loan or line of credit?

It is easier to get a personal loan than to get a credit line.

However if you have a good credit score,and you are embarking on a project and If you don’t know how much money you will need, getting a line of credit will allow you to apply for the maximum amount you might need and then access the funds as you wish and pay interest only the amount you use.

That is not always a good thing.

Sometimes you might be better off by getting a fixed loan amount as then you will not overspend. Furthermore, loans offer fixed monthly payments – making it easier to budget.


Loan or Credit Card:  Which is better?

If you have bad credit, using your credit card as a loan is probably not a good idea. Many people with bad credit struggle to find a credit card with a low APR. You might only be able to get subprime credit cards which have an APR of 30% – 80%.

But what if you have good credit or just pay the average amount of interest on your credit card? Is it a good idea to pay for things on a credit card- even if it means carrying the balance at the end of the month?

Most financial advisors will agree that borrowing money from a credit card is not recommended. Not only do you pay a high-interest rate on credit cards, but you also get charged a fee every time you withdraw cash.

The average interest rate of credit cards in the UK is around 20% APR. Additionally, you will pay interest and perhaps a fee every time you need cash from an ATM. Furthermore, the temptation to pay only the minimum amount due at the end of the month makes this even more expensive. Interest charges quickly rack up and result in higher costs as you are paying interest on interest.

For the above reasons, a financial expert will always suggest that credit cards only be used for purchases and not for cash. For the sake of your financial well-being, you should always try to clear the balance of your credit card at the end of the month.


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Hidden Cost Of Credit Cards

It is not always apparent when using a credit card that the accruing interest for cash withdrawals begins at the date the withdrawal is made and not at the end of month statement date. Additionally, you can easily fall foul of charges for late payments if your statement arrives late. Thus attracting, even more, fees and interest.

If you do use a credit card regularly, then Internet banking is highly recommended. Using this can keep up to date with statements and the total amount you owe.

What About 0 Interest Credit Cards?

Using a credit card that offers a 0% interest rate instead of a loan may look like a good way to borrow money at no interest. In some instances, it can be. However, you need to be strictly disciplined about clearing the balance before the 0% interest period runs out. Most credit card companies will charge much higher than average interest rates when the 0% period has expired. 0 interest credit card is probably the best credit card for borrowing money – only if you make sure to pay back the credit before the 0% expires. (usually around 40 months).

Purchase Protection on a Credit card

When you are buying items with a credit card, consumer credit laws protect you if you don’t receive the goods in reasonable condition. If the goods get lost or arrive faulty or damaged – your credit card provider needs to reimburse you, repair the item or find a suitable replacement.

Laws Offering Protection for Credit Card Purchases
Cost of Good Law offering Potential Coverage
£100 – £30,000 Consumer Credit Act -Section 75
£30,000 – £60,260 Consumer Credit Directive


If you make a purchase using a loan, you will not recieve the same protection from the lender.

Loan vs Credit Card: Which is the better option?

Loans help you contain your debt with structured borrowing of fixed amounts and offer low APR for medium-term and long term loans. Credit cards provide payment protection on purchases yet are only suitable for short term borrowing so you should pay off the balance each month.

Using a loan will give you greater peace of mind than even a 0 interest credit card. With a loan, you know exactly what you will pay in interest and how much you need to budget each month for loan repayments.

If you want to borrow at no interest, then a 0 interest credit card works better than any low APR loan. But you need be sure you can pay off all the entire credit card balance before the 0% deal runs

Furthermore, if you can afford to clear the debt by the end of the month, it is a good idea to purchase items on a credit card as you will receive payment protection.

Check your credit card balance before your 0% expires. -

Check your credit card balance before your 0% expires. -

Only you can decide which option will suit your current lifestyle and financial circumstances.

Summary: Loan Options Available

Personal Loans Now discussed the various loan options you have to borrow money. We showed the different methods of borrowing cash using personal loans, overdrafts and credit cards. This included the costs of borrowing with the various loan options and learning about terms of the accounts, extra fees and interest rates.
Only you can decide which option will suit your current lifestyle and financial circumstances, but you might find this infographic about the best loan options helpful.

1. Nationwide Overdraft Calculator (5 September 2019). Figures calculated by multiplying Nationwide’s monthly usage fee of £28.91 by 3 months at November 2019 rates. Computed 5 September 2019,
2. Natwest (5 September 2019). What is an unarranged overdraft usage fee?. Accessed on 5 September 2019 from


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