Credit card or loan?

When you just don’t have the cash to buy something you want or may need, some people will use a credit card to pay for things, but others may choose to borrow the money and take out a personal loan.


But which is the better choice?

It all depends on the amount you are spending and how long it will take you to pay it back. Ideally credit cards should be used for balances that are short term and can be paid off in full each month. Loans are more suitable for medium to long term debt. We look at both in a little more detail to show when using one versus the other would be more beneficial.


Credit cards

When you spend on a credit card you have the choice of repaying some or all the money you have spent on the card. As you will have a credit limit this means you can keep using the credit facility as your balance allows. If you pay your outstanding balance in full each month you won’t pay any interest. If you don’t you will be charged interest on the amount you have spent. Credit card APR’s will vary. The average is around 18%, but the APR and amount of credit you will get will depend on your credit score.

Credit cards are a better option than a personal loan if you will be using it to purchase things regularly and are unsure of how much you will need to borrow. They also give you flexibility when it comes to repaying the debt and offer protection. Under section 75 of the Consumer Credit Act, anything costing between £100 and £30,000 that has been paid for partly or in full using a credit card means the credit card company along with the retailer is jointly liable should anything go wrong.

But borrowing on a credit card requires a lot of discipline compared to a personal loan. Because it allows you to keep spending up to your credit limit, if you don’t clear the balance each month you will pay a fortune in interest charges.


Personal loans

Personal loans are better than credit cards if used to buy something expensive that you could not afford to pay off in one go. They are also better to use if you want to consolidate other debts, so your total monthly repayments are less. Most lenders will price their loans in tiers and usually the more you borrow the lower the APR will be. So, bearing this in mind, it’s worth checking out the APR rates for slightly higher amounts too as it could save you money borrowing a little more. For example, if you borrowed £7000 over 60 months with an APR of 13.9% it would cost you £159.58 per month. But if borrowing £7500 meant the APR went down to 6.4% it would mean a drop in the monthly repayment to £145.76 and a saving of £829.20 over the 5-year term of the loan.

As with credit cards, the APR you will be offered will depend on your credit score. Because you can’t keep reborrowing as you make repayments loans are a better way to control spending as you will have to budget for the same amount each month. And providing you make the repayments each month you are clearing the debt and it will be repaid at the end of the term.