What are they?

A loan is a type of borrowing where you take out a set amount of money, often from a bank or loans company,  for an ‘agreed amount of time’.

You pay back the full amount – in monthly instalments – plus interest.

For ‘Fixed-term’ loans, the rate of interest remains ‘fixed’ from the moment the loan is taken out, and won’t change for the duration of the borrowing time.

The rate of interest for ‘Personal Loans’ are typically lower than for overdrafts, or credit cards.

What are they used for?

Loans are mostly used for big purchases, such as cars, luxury items and home improvements. You can even consolidate lots of smaller previous borrowings into 1 simple payment, as opposed to lots of different previous agreements, all costing different rates of APR, and dates when money is taken from your bank account.

Be aware of

Keeping up with repayments. You must make sure you can afford the monthly repayments, over the set amount of months or years agreed. If you fail to repay a personal loan on the monthly due dates, it can affect your credit rating, which may make it harder for you to borrow money in the future. 

What are they?

A credit card is a type of borrowing where you purchase items immediately, and agree to pay the bank or lender back at a later date. 

When you make purchases with a credit card you have to repay ‘at least’ the a minimum payment – which is usually a percentage of what you owe – each month. You can also repay in full, if you have the money to do so.

You’ll have a credit limit, which means you can spend as much as you need on the card up to that amount.

Some credit cards offer services such as ‘balance transfers’ (moving the balance from one credit card to another) and 0% purchase credit cards, offer interest-free periods. 

What are they used for?

Credit cards are mostly used for larger one off or regular purchases, such as luxury items, holidays, white goods like washing machines. Many people use them for grocery shopping, especially if you are doing an expensive shop and you don’t get paid for a few more days. 

Credit cards provide the owner with much needed breathing space, which is very helpful when you’re short of cash that month, due to foreseen circumstances, such as unexpected vet bills or the boiler dies.

They also offer you some additional legal and buying protection, compared with using your normal current account card.

Be aware of

If you don’t repay the amount you owe in full each month, you’ll typically be charged interest which can keep piling up. Ideally you should aim to pay back as much as possible to avoid the debt becoming worse.

Some credit cards offer 0% APR across lots of borrowing or deft shifting, which is excellent. It means, apart from transfer fees etc, if you borrow £1000 from your credit card company, and pay back the £1000 within 6-18mth (whatever the interest free term is), you pay back the £1000 and nothing else! Buy you must have a plan to pay back that money and stick to it, to avoid the APR charges.

What are they?

An overdraft is used in your current banking account. If your account balance goes into negative pounds, i.e. say an unknown bill came out and it’s put your account which had £200 left in it, now is -£50, the bank effectively covers the payment so you don’t default with the company who took money from your account.  

What are they used for?

If you spent a little too much this month, i.e. more than you had in your bank account, the bank will still honour the payments. Many people use overdrafts daily, and when they are paid each month, their salary simply repays the overdraft debt used.

Be aware of

If you have an ‘Arranged Overdraft’ with your bank, you may be able to go -£ up-to a set amount without being charged for the privilege. 

However, once you go over the amount set by your bank, it becomes an unauthorised overdraft, and then they begin hitting your with fees, which can mount up daily. lastly, make sure your bank makes you aware of any changes to charges that may occur. This can change often or after a set time period.