Credit Card Vs. Personal Loan: Which Is Best For You?

If you need to borrow money, you may be wondering whether to apply for a credit card or a small personal loan. While these are two of the most popular types of borrowing, there are many factors to consider.

So, personal loan or credit card: which is best for you?

Let's find out.

Difference between credit cards and personal loans

When deciding whether to get a credit card or personal loan, the best option for you will depend on your own personal circumstances, credit rating, and financial needs.

Each lender will review your credit score and credit history to determine what loan rates and funding they're comfortable giving you as the borrower.

Used responsibly, a credit card can provide you with valuable protection, a chance to build your credit score, and possibly receive generous rewards and credit card points. 

It's a good idea to compare a few different credit cards to find one that's right for you. 

Choosing a 0% credit card can be a particularly affordable way to borrow, as you won't have to pay any interest during the initial interest-free period.

However, for those who need access to a large amount of money quickly, a personal loan may be more suitable. 

An unsecured loan can be particularly ideal for those who don't need flexibility and are good at meeting strict payment terms. 

Whether you get a credit card or a personal loan, failure to repay the money can have consequences. Make sure you can afford the debt before making a loan or credit card application.

Note: it's always wise to check the terms and conditions of any loan or credit card you decide to take out. Depending on your financial situation, missed or late payments can result in heavy fees.

What are the advantages of credit cards?

Flexible borrowing – As long as you don't exceed your credit limit, you can spend as much or as little as you like. The cost of your credit card will depend on how you use it.

Flexible repayments – It's a good idea to stay ahead of your repayment schedule. This will protect your credit score and make it easier to keep on top of your debt. However, if you'd like to just pay the minimum payment, you can.

Introductory interest rates – Some credit cards offer a 0% interest-free period, making the debt more affordable in the short term.

Security - Section 75 of the Consumer Credit Act states that for any purchases between £100 to £30,000, the card issuer must help you get your money back if the seller goes bankrupt or doesn't deliver what you ordered.

Rewards - Some credit cards offer cashback or rewards/points. The points can often be exchanged for money off shopping, flights or holidays.

Credit card debt consolidation - if you struggle to repay your balance in time, there's always the option to consolidate your debts into a single credit card. This makes repayments much easier to manage.

What are the disadvantages of credit cards?

Higher interest rates - Interest rates can be high, especially if you have a low credit score. This can increase your monthly fees. If you have savings this can help you budget and plan for higher rates, however, it's something to consider before taking out a credit card.

It can take a long time to clear your balance - This is because there's no deadline stating when the full amount needs to be paid.

Unsuitable for borrowing large amounts - Credit limits can vary and if you're looking to borrow a large amount, you may struggle to find a credit card company that offers a high enough credit limit.

What are the advantages of personal loans?

Access a set amount – If you have unexpected expenses a  personal loan can help you access the money you need quickly. However, it’s important to research the application process as it could take longer for approval or access funds in the time frame you are looking for.

A fixed-term - When you apply for your loan, you'll be given a fixed-term outlining when the full amount must be paid by. The larger the personal loan, the longer you'll usually have to pay it back.

Higher loan amounts - When taking out a personal loan, you may have access to a larger amount of money than if you used a credit card. If you're looking to make large purchases, a personal loan may be more suitable than a credit card.

Predictable interest rate and payments - If you choose a fixed-rate loan, your interest rate will stay the same for a set period.

What are the disadvantages of personal loans?

Higher interest rate - Credit cards tend to have a higher APR, but with introductory offers and the option to pay back in full can equate to no interest. On the whole, personal loans tend to offer a lower APR, despite interest rates.

Early repayment penalties - If you want to pay your loan off early, you may be charged a penalty.

Fixed payments - While credit cards offer flexible payments, personal loans will be fixed from the start. This can be a good option for those who can handle a strict schedule, but it may be unsuitable for those needing flexibility.

Is a credit card worse than a loan?

A credit card is no worse than a loan, but it may be unsuitable for some people, due to high-interest rates and a limit on the amount you can borrow.

There are many positives though. A credit card can be particularly useful for regular spending and borrowing small amounts. 

Credit cards can be more flexible than personal loans. If you pay your credit card bill in full, you won't pay interest. 

This can be a smart way to manage your credit card debt and improve your credit score over time.

If you're unable to pay off your balance in full because you're short of cash, you can just pay the minimum and carry a balance over to the next month. 

This can make your repayments more manageable, but interest will be added and the debt will become more expensive.

It's possible to make credit card interest cheaper with the help of balance transfer cards. These allow you to transfer balances from existing credit cards with higher interest rates over to one that offers 0% interest for a certain period of time.

Personal loan or credit card: what's the best option?

If you need to borrow money to fund a large expense, whether it's a new car, home renovation, or wedding, a personal loan may be a better option for you than a credit card.

You'll get fast access to the money you need upfront (typically a figure between £1,000 to £25,000) and you'll know from the outset how much money needs to be repaid each month. 

These fixed payments can make it easier to budget.

A personal loan can also be used to pay off other debts. For example, if you can get a personal loan with a low-interest rate, you may decide to use this money to pay off high-interest credit card debt or payday loans.

If you have a good credit score and a reliable income, you can usually get a personal loan at a better interest rate than a credit card. 

​​By weighing up the pros and cons of each option, you can find the one that’s right for you.