Loans and credit cards offer two different options for you to borrow money, but which is more suitable for your situation?
Loans and credit cards are types of credit offered by lenders where you have to repay the sum borrowed with interest. There are advantages to both options, as choosing one or even both could potentially boost your financial status. We take a close look at the facts to help you compare the two and make the best decision for your situation
What is a credit card?
A credit card is a type of flexible loan from a card lender, often used to pay for purchases where you may not have the available cash ready. You receive credit from a lender, which you can then spend using their card. The lender will add interest to the amount borrowed and unless you clear the balance, you will be required to pay the minimum amount each month.
Pros of credit card
- Ideal for smaller borrowing of up to £5000, especially with 0% introductory rates available. Often comes with added cashback and rewards on purchases.
- Usefully all credit card purchases over £100 are covered by the Consumer Credit Act, providing you with that extra protection should anything go wrong.
- You may be able to make money transfers into your current account at lower rates than a personal loan, which can be useful if you need the cash.
- Using a credit card wisely can benefit your credit rating and help your chances with larger financial applications.
Cons of credit card
- The interest rate increases when introductory deals end, typically 18.9% APR upwards, so aim to pay off the balance beforehand.
- It can take longer to clear the balance and cost more in interest when there is no fixed term, and you are just paying the low minimum amount each month.
- There is no guarantee you will get the deal advertised, as the interest rate, limit and introductory period can be affected by your credit history. Each application goes on your credit file too and can affect future borrowing.
What is a personal loan?
A personal loan is the short term borrowing of a fixed amount of money from a bank or other lender, at a fixed rate of interest over a fixed term. It is often used to finance a new vehicle or house renovation or consolidate debt or any number of other reasons. You receive your loan in one lump sum, which you will then pay back in regular monthly instalments.
Pros of a personal loan
- Ideal for borrowing larger amounts than are available with credit cards, especially with competitive rates of 3.5% APR representative for amounts from £7000 to £15000.
- You can choose how long you will need to repay the money you borrow, which can help you to manage repayments for a large sum over a number of years.
- Managing your debt is more straightforward as you pay a fixed amount each month until the loan is paid back.
- Interest rates are generally lower for personal loans than credit cards, not including introductory deals.
Cons of a personal loan
- Interest rates can be higher if you are only borrowing a small amount
- Lengthening the term can reduce monthly payments, but the longer the term of repayment, the larger amount of interest you will have to pay.
- The rate you receive is largely dependent on your credit score.
Which is better - loan or credit card?
If you are looking to borrow a small amount of money, and can cover the balance in full each month, then a credit card with an inviting 0% introductory rate could suit your situation. For larger amounts, a personal loan with lower interest rates and fixed terms would fit the bill. However, unless used wisely the credit card comes with more risks, especially if you find yourself just paying the minimum each month, whereas the straightforward fixed terms of a personal loan provide simple peace of mind with a steady monthly payment.
Depending on your circumstances, and how you manage your money, there may be a type of borrowing that is more suitable for you. It is always best to do your research, compare the options and take a look at what is on offer before you decide to go forward with an application.