Secured Loans vs Credit Cards
Credit cards and secured loans are both common ways to borrow. But they work in different ways and suit different needs. The right choice for you will depend on your financial situation and goals.
In this guide, we’ll explain the key details of each option and help you understand which one might be the right fit for you.
What are credit cards?
Credit cards are physical or digital cards you can use to make payments. They let you borrow money to pay for goods and services, which you then pay back to the card provider later.
If you don’t repay the balance within the agreed time, it begins to build interest. How much you pay back and when will depend on the terms of your credit card agreement. That’s why it’s important to understand how it works before you use it.
Pros of credit cards
- Cost spreading: Some credit cards offer 0% interest deals, so you can spread the cost of a larger purchase over several months without paying any interest. Just remember to make your minimum payments on time.
- Credit building: Using a credit card and paying it back on time shows that you can manage credit responsibly. Over time, this may help improve your credit score and make it easier to be approved for other credit, like loans or mortgages.
- Reward earning: Some cards offer rewards like points, air miles or cashback on everyday spending. You usually need to keep up with your monthly repayments to earn these rewards.
- Purchase protection: When you buy something between £100 and £30,000 on a credit card, you’re covered by Section 75 of the Consumer Credit Act. This means you can claim back your money if the item doesn’t arrive or is faulty, or if the company goes out of business.
Things to consider with credit cards
- Debt risk: If you don’t repay what you’ve spent, interest charges can add up quickly. It’s easy to get caught in a cycle of debt if you rely too much on your credit card or only make the minimum payment each month.
- Interest and fee costs: Some credit cards have high interest rates or additional charges, such as annual fees, late payment fees or foreign transaction fees. Always check the APR (Annual Percentage Rate) and read the fine print before applying.
- Credit score impact: Missing payments or paying late can hurt your credit score and make it harder to borrow in the future. Maxing out your credit limit or applying for too many cards in a short period can also negatively affect your credit rating.
- Usage limitations: Using your credit card to withdraw cash or make purchases abroad can lead to extra costs. However, there are special credit cards designed for overseas use. These may be a better option if you travel frequently.
- 0% periods: Once a 0% period ends, that card’s usual APR will apply to any remaining balance.
What are secured loans?
A secured loan is a type of borrowing where you use something you own as security, usually your home. This is why these loans are often called secured homeowner loans.
Like any form of borrowing, it’s important to feel comfortable that you can keep up with the repayments before you go ahead. If you fall behind and don’t maintain the agreed repayments, your lender may take steps to recover the money you owe. Such steps could include taking possession of your house.
Pros of secured loans
- Flexible use: You can use a secured loan for almost any legal purpose. Common reasons people choose secured loans include consolidating debt or making home improvements.
- Access to larger loan amounts: With a secured loan, you might be able to borrow more than with an unsecured loan. That’s because the risk for the lender is reduced by the collateral.
- Available with bad credit: If you have a less-than-perfect credit history, secured loans can still be an option. Lenders may be more willing to lend if your loan is backed by an asset, like your home.
- Flexible repayment terms: Secured loans often come with longer repayment periods, giving you more flexibility when it comes to managing your finances.
Things to consider with secured loans
- Property risk: If you miss your repayments, the property you used as security could be at risk. Before committing, it’s essential to check that a secured loan is right for your specific circumstances.
- Total loan cost: Since secured loans are typically repaid over longer periods, you may end up paying more in interest over time. Make sure to consider the long term impact on your budget.
- Risk of financial difficulty: It’s important not to borrow more than you can comfortably repay. Taking out a larger loan than necessary could lead to financial strain in the future.
- Early repayment fees: Some lenders may charge a fee if you decide to pay off your loan early. Be sure to ask about any potential charges upfront when you take out the loan, so there are no surprises later.
Secured loans vs credit cards: which is right for you?
The choice between a credit card and a loan hinges on your financial requirements and situation. Here are some situations in which each option might be more appropriate:
When a credit card might be more suitable
Credit cards may be a good choice for short term needs or smaller, occasional expenses. They give you the flexibility to manage your cash flow, allowing you to make purchases without committing to a long term loan. If you’re looking for flexibility in how and when you repay, a credit card could be a convenient solution.
When a secured loan could be more suitable
If you’re planning a large, one off purchase but don’t have the funds readily available, a secured homeowner loan may be the way to go. With a secured loan, you can borrow a larger sum and repay it over a fixed period. This may be a more suitable option if a credit card’s limit doesn’t meet the size of your intended purchase.
Explore your borrowing options with Evolution Money
At Evolution Money, we provide secured homeowner loans from £5,000 to £105,000, with flexible repayment terms from 3 to 20 years. If you’re exploring your borrowing options, we’re here to help you understand what might work best for you.
Feel free to check your eligibility with us without any impact on your credit score. You’re also welcome to get in touch with us for a free conversation with one of our advisers. We’ll help you understand your choices and see if a secured homeowner loan could be a good fit for you.
Loans are subject to status and affordability checks. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debts secured on it.
Representative 21.54% APRC (Variable)
For a typical loan of £12,000 over 60 months with a variable interest rate of 21.54% per annum, your monthly repayments would be £310.60. This includes a Product Fee of £1,200.00 (10% of the loan amount) and a Lending Fee* of £763.00, bringing the total repayable amount to £18,635.80. Annual Interest Rates range between 8.6% to 27.87% (variable). Maximum 50.00% APRC. *Lending Fee varies by country: England & Wales £763, Scotland £1,051, Northern Ireland: £1,736.
Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other loan secured against it. If you are thinking of consolidating existing borrowing, you should be aware that you may be extending the terms of the debt and increasing the total amount you repay.
