Should I get a loan or a credit card?


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If you want to borrow money, it's essential that you do your research and choose the right method


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 that you know the pros and cons of each deal.

Should I get a credit card?

Credit cards can be a short-term solution for borrowing money, provided you make payments on time and don’t exceed your credit limit. Credit cards could also boost your credit rating, as borrowing money and paying it back on time could make you a reliable candidate for other financial products in the future.

What do I need to know about credit cards? Credit cards require a minimum payment every month - usually around 3% of your credit limit. 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. The credit limit and interest free period you’re given will depend on your credit score.

When you apply for a credit card, you won’t know your credit limit until the lender has accepted your application. Credit cards with a longer introductory period may have a higher APR  (annual percentage rate). APR includes the card’s interest rate as well as 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 make sure you read the terms carefully.

How could a personal loan help?

Loans can range from anywhere between £1,000 to £50,000, or more, 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.

It often tends to be the case that the bigger the loan, the lower the APR. 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.

Due to their terms, some loans lack flexibility, and you may have to pay a fee if you choose to pay off the loan early. Unlike a credit card, you’ll have to pay a set amount every month, rather than having the freedom to pay off different sized chunks and adapt to your outgoings month on month.(you might be able to make overpayments) Any purchases through your loan are not protected, and if it’s a secured loan, 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 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, 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, and if they do they may charge a 3% surcharge.

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. Buying a car with a loan is the most cost-effective option after cash, but while loans are 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 earn rewards such as cash back or air miles, which could be very handy for the honeymoon! Borrowing via credit card also keeps everything protected, so if things go awry, the money isn’t lost.

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

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

However, if you’re looking to consolidate your debts or make a larger purchase, then a loan might be for you. The offer you receive on both options will vary depending on your financial situation and your credit history, so always make sure that read the terms and conditions of your lender.

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

Many people apply for a new credit card to pay off debt on a current card. This is usually recommended for people who are a few hundred to a few thousand pounds in credit card debt.

To prevent the debt from increasing with interest, you should apply for a credit card with a 0% balance transfer period and pay this off before the interest-free period ends. This process can be repeated until the debt is cleared. Note that only people with a good credit score are likely to be offered 0%

Need more information?

If you want more information on whether to choose a loan or a credit card, visit the Money Advice Service. Use Admiral's Personal Loan calculator to find out how much you can borrow. 

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