When to use loans, credits cards and overdraft
At some point, everyone will need a loan, a credit card, or to use an overdraft. Knowing when and how to use these different credit products is important to manage your finances with confidence. A recent report from the National Bank revealed that there has been a decrease of 1.3% in Belgian loans and 17.8% less credit provided, despite the pandemic causing financial hardship.
Aion Bank wants to empower consumers to make smart banking decisions, and have gathered detailed explanations of loans, credit cards and overdraft to help make practical financial decisions.
When should I use a loan?
Bank loans are one of the most varied types of finance you can get and serve a variety of different purposes. The first step to understanding loans is to know what types are available.
A personal loan can be used to cover costs linked to the purchase of more expensive goods or services and for a range of different life events, including purchasing a new sofa, paying for a holiday, home cinema, wedding, studies, or to even redecorate your entire home or garden.
Other loan types include car loans, which finance vehicles, and mortgages, used to purchase or renovate property. While you can use a personal loan for almost any purpose, car and home loans need to be used for those specific purchases.
Personal loans are also often used for “debt consolidation”.
Debt consolidation is when you apply for a loan and use it to pay off multiple other loans, overdrafts or credit cards, meaning you only have one outstanding monthly payment to make. Your credit card debt often costs you more than taking a personal loan and repaying the card debt immediately, so this can be a smart strategy when managing debt.
However, you might not always need a loan: credit cards and overdrafts can be better if you don’t want to repay the money over a long period of time; and credit cards in particular offer more flexibility with how much you pay each month.
When should I use a credit card?
Credit cards are widely and internationally accepted and you receive your expenses in one single monthly overview, making them ideal payment methods for vacations or business trips. This makes credit cards very useful in situations where either you need security on your payment, or you don’t currently have enough money to cover an emergency situation. Credit cards have payment protection against faulty products or disruptions to services, and you may be able to claim your money back if there’s a problem.
There are three types of credit cards in Belgium: the traditional credit card, revolving credit cards and prepaid credit cards..
With a traditional credit card, the money is not immediately taken out of your bank account, but your expenses are summed up over the course of one month; at the end of the billing period (one month) you receive a statement outlining all expenses, and the total amount is debited from your current account. These credit cards don't require a credit contract and are usually not registered at the National Bank of Belgium.
Revolving credit cards allow you to choose how much money you repay each month. You need to make a minimum payment, but this can be a fraction of the amount spent - so if you need to pay for an emergency in a hurry, you can spread the costs out over several months instead of paying all at once. These credit cards do require a credit contract and are registered at the National Bank of Belgium. Therefore, your repayment capacity for revolving credit cards is a factor when applying for other loans.
However, these cards do come with limitations. Revolving credit cards, like all other credit cards, have a spending limit and usually the interest rate paid on the loan amount is often much higher than with personal loans. This means a personal loan might be a better option for more expensive purchases, and it can be harder or take longer to fully repay credit card debt.
What is an overdraft?
An overdraft is another type of revolving credit that allows you to borrow money in the short-term with a pre-arranged limit, and is usually part of a debit account.
It’s often used as a safety net to protect against unexpected expenses like bills or an emergency, similar to how you might use a credit card. A major benefit of this type of loan is that you only pay interest on the credit amount you use.
However, the interest rates can often be high, and the amount that you can borrow through your overdraft is usually lower than you would be able to secure with a personal loan or a credit card.
They are primarily useful for security against unforeseen circumstances, rather than something which should be used as part of financial planning.
Which type of finance is best?
Each of the different types of finance have their place, and you should evaluate the best product that suits each specific situation. It is also important to make sure you have visibility of the offers available on the market. Aion Bank’s Financial health check is free, and anyone can find out if they are currently receiving the best deals for personal loans, overdraft, savings deposits and household bills.