Determining the differences between credit products isn’t always clear cut. Different lenders use different terminology and phrases that can confuse your understanding of how credit works, and which type of facility would best suit your circumstances. Revolving credit is the same as a running account credit service: the credit is continually available up to your credit limit, as long as you stay within the terms of your credit agreement. Revolving credit has various purposes and can be useful in many ways, but it could also encourage overspending and unnecessary indebtedness. If you don’t need continual access to credit, then you may want to consider a loan, as opposed to revolving credit. Loans refer to fixed-term agreements, but the terms can vary from 1 month to 35 years, depending on the type of loan.
A payday loan is a type of short term loan, which means (as the name suggests) you borrow over a short period. Payday loans, sometimes known as same day loans because you often receive the funds on the same day you are approved, have a fixed duration of around 1 month, though some lenders may vary the exact term by a few days to suit your paydays.
It can therefore get a little confusing when you come across instalment loans, as instalment loans are like payday loans that can be borrowed for up to 12 months. They are still considered short term loans, even though the loan term is much longer than a single month payday loan. But, compared to a personal loan from a bank or a mortgage, which have loan terms of around 5 years and 25 to 35 years respectively, even instalment loans have a short duration.
The difference between payday loans and revolving credit might then become quite clear, as you only have a payday loan for a month, and you can borrow revolving credit for much longer. But instalment loans may still seem confusing as you can borrow for longer than a month. The key difference is you receive the credit only once when you are approved for an instalment loan or a payday loan. If you apply for £300, you will receive that £300 into your bank account to spend as your circumstances require. However, if you have a credit card or a credit line, both of which are examples of revolving credit, and your credit limit is £300, you can withdraw any amount up to that amount any time you need to. So, if you only needed to borrow £50, that’s the amount you would use. You could then withdraw another £50 three months later.
There are pros and cons to both types of borrowing. Loans have fixed terms which also means you have fixed repayments. You can therefore budget accordingly and you may find managing your money much easier as you know exactly how much you have to repay each month. However, you can only use the credit that’s been transferred to you – if you needed to borrow more at a later date, you would have to submit a new application or apply for a different credit product.
On the other hand, having access to a revolving credit facility means you only have to apply once, and you can meet any unexpected bills or cashflow issues without submitting new applications. Your repayment amounts would be different each month which can make it harder to budget, and you could be tempted to use the credit on non-essential purchases or be inclined to make only the minimum payments each month, so you have more disposable income for other things. This increases the time it takes to repay the amount you borrowed and can cost you more over your borrowing period.
You can probably see why it’s worth comparing different products to find a suitable way to borrow depending on the reasons you need money. Once you’ve decided the type of credit you’d like to use, you also need to compare the individual lenders and even the products offered by each lender. You might find a lender offers 3 different credit cards, and you’d need to work out which one is going to be the most help to you.
Using loan comparison websites is the easiest way to do this, as their algorithms do all the calculations for you. You only need to enter how much you want to borrow, and for loans, how long you want to borrow for. The website will then give you a list of products that meet your requirements. If you’re just looking for the cheapest option, then make sure your results are listed by price and that any products at the top of the page aren’t promoted products, as they may not be the cheapest. If you’re more concerned about finding an option that makes life easier for you or is particularly flexible with repayment dates or amounts for example, then you may have to do a little more research. The cheapest option might not always be the most appropriate!
All you need to know about short term loans
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