Getting a loan versus a credit card: what are the pros and cons?

A woman budgeting at a table

Whether you need a short-term solution for regular purchases or want to manage your long-term finances and repay debts, a credit card or a loan could be the solution you need.

Whichever method you choose, you’ll need to make sure you know the pros and cons of each deal. 

Should I get a credit card?

Credit cards can be a short, medium or long-term solution if you need to borrow money, as long as you make payments on time and don’t exceed your credit limit.

Having a credit card could also boost your credit rating, as borrowing money and paying it back on time makes you a reliable candidate for other financial products in the future.

They require a minimum payment every month, and if you don’t pay off the full balance on your card each month, you’ll be charged interest.

Some credit cards offer an introductory interest-free period. This means you won’t have to pay any interest on what you spend for a fixed amount of time. Plus, if you pay off your credit card before the interest-free period ends, then it won’t have cost you anything to borrow the money.

Your credit limit and interest-free period will depend on your credit score and other rating factors.

When you apply for a credit card, you won’t know your credit limit until the lender has accepted your application. Credit cards with an extended introductory period may have a higher APR (annual percentage rate).

APR includes the card’s interest rate and any fees and charges. The average credit card charges around 18% APR.

All credit cards charge for cash withdrawals, most charge for foreign transactions, and some have an annual fee, so read the terms carefully.

How could a personal loan help?

Loans can range between £1,000 and £50,000, and provide a structured repayment method. With a loan, you apply for your desired amount, so you know how much you’ll get if the loan is granted.

The repayment period and the interest are agreed in advance (known as the term), so managing the debt can be more transparent than borrowing on a credit card.

What do I need to know about personal loans?

No matter how big or small the loan, it comes with interest and the rates depend on your credit score.

Often the bigger the loan, the lower the APR will be. That’s why if you only want to borrow a few thousand pounds, you may be better off applying for a credit card where the interest rate is usually lower or comes with an interest-free period.

Some loans lack flexibility, and you may have to pay a fee if you choose to pay it off early. Unlike a credit card, you’ll have to pay a set amount every month rather than being free to pay off different-sized chunks and adapt to your monthly outgoings.

Any purchases through your loan are not protected, and your house may be at risk if you don’t make your payments.

When should I borrow on a credit card or loan?

If you're preparing to make a big purchase, like a car or a wedding, you might have to choose between a credit card or a loan. 

Buying a car

Many people opt for a credit card when buying a car that costs around £5,000-£7,000 because purchases are protected by Section 75 of the Consumer Credit Act, with some receiving a 0% interest offer with an extended period.

Even when paying over the minimum monthly payments, this is often cheaper than purchasing a car on finance. However, once the interest-free period ends on your credit card, the rates will be higher. Not all car dealerships accept credit cards, however.

If buying a car using a loan, you can spread the cost over one to seven years with relatively low, fixed-rate interest, but monthly repayments could be higher.

While loans can be quick and easy to arrange, you may have to wait for the money to reach your account. A loan might also affect you from borrowing funds elsewhere.

Getting married

If you’re getting married, you may find that you can pay for big expenses with a credit card, spreading the cost and paying zero interest for an agreed period of time. You may even earn rewards such as cashback or air miles.

Borrowing via credit card also protects everything, so the money isn’t lost if things go awry.

Paying for a wedding with a loan means you can borrow a hefty amount to cover the cost of the whole wedding and pay it back in manageable chunks with fixed interest.

The verdict

A credit card could be more cost-effective than a loan if you’re looking to borrow around £5,000 or less.

However, a loan might be for you if you want to consolidate your debts or make a larger purchase.

The offer you receive on both options will vary depending on your financial situation and credit history, so always make sure that you read the terms and conditions of your lender.

I’m in debt with a current credit card - should I get a new one?

If you already have a credit card and want to extend the interest-free period, you could apply for a balance transfer credit card. This is usually recommended for people with a few hundred to a few thousand pounds of credit card debt.

To prevent the debt from increasing with interest, apply for a credit card with a 0% balance transfer period and pay this off before the interest-free period ends.

Note that only people with a good credit score are likely to be offered 0%; you may have to pay a fee to transfer the balance over. 

Need more information?

For more information on choosing a loan or a credit card, visit the Money Advice Service.

Whatever your plans, an Admiral loan could help