Trying to decide between a loan and a credit card?

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Loans vs Credit Cards

There’s a right way to borrow money, and it won’t be the same for everyone. What are your circumstances? How much do you need? We talk through the pros and cons of the two most popular ways to borrow money: loans and credit cards.

In This Guide:

Loan or credit card: what’s the difference?

A loan allows you to borrow a fixed, lump sum of money for a set term, which you pay it back in agreed monthly instalments with an additional rate of interest. A short-term loan is repaid within a year, otherwise your loan is considered to be long-term.

By contrast, a credit card allows you to borrow up to a set limit, as agreed by your provider. This limit will depend on your credit score, so whether you’re eligible to borrow the sum you need is something to consider. You’ll make purchases on your credit card and then pay off the balance, making sure you make minimum monthly repayments to avoid being charged. You can continue borrowing this way as much as you like up until your limit.

Whichever way you borrow, make sure your credit score is in check before you do. Those with top scores get accepted for cheap loans and the best credit card deals.  But more than that, you must be certain you can keep on top of your repayments as otherwise fees and charges can quickly accrue and can negatively impact your credit score.

Advantages of Loans

Loans are more tailor-made than credit cards – i.e. you have many more options. You can choose the exact sum you want to borrow and the repayment term. Because of this, it’s easier to budget and manage your finances as you have set outgoings that you need to stick to.

Depending on how much you want to borrow, you could get a much better rate of interest than with a credit card, particularly if it’s a larger sum. It’s worth your time to compare loans with our search engine so you can see what deals are available.

Disadvantages of Loans

Depending on your preferences, set repayments can feel too structured due to their inflexibility. There’s no wiggle room. If you miss a repayment, you’ll incur penalty fees and this’ll be added to your credit report.

In addition, interest rates for smaller amounts can be fairy steep: in general, the more you borrow, the lower your interest rates. Plus, if you want to pay off your loan early then it’s not the smoothest process: you’ll often be charged early repayment fees.

Advantages of Credit Cards

Credit cards have flexible repayments. That means you can choose how much you want to repay each month to suit your finances, though just make sure you make the minimum monthly repayment in order to not incur interest. If you want to borrow a small amount, then you’ll likely get a better rate of interest than with a loan.

Credit cards are protected by Section 75 of the Credit Consumer Act. That means that if anything goes wrong, your credit card provider is jointly liable with the retailer for any purchase made between £100 and £30,000, including deposits. On top of this, there’s the Consumer Credit Directive, which protects you against purchases of £30,000 to £60,260.

Another perk of credit cards is you can pay them off in full whenever you please. You’re not bound to a set repayment plan and won’t incur early repayment fees.

Disadvantages of Credit Cards

Credit limits depend on your credit history, so you may find a credit card doesn’t allow you to borrow as much as you need.

Furthermore, interest rates can be high – between 15% and 25% - particularly for those with bad credit histories. Some credit cards come with 0% interest for a set time, and often these are pretty enticing deals. But, if the balance isn’t paid off before the 0% period ends, then interest can be costly.

Last, because there’s no set repayment plan, it’s your prerogative to ensure that your balance is paid off, and this can mean it takes a long time to clear.

Should I get a credit card or loan?

Credit cards are great for day-to-day spending of small amounts. Consistently paying off your credit card in a timely manner means you’ll be building up your credit score, and interest rates for small sums are competitive. You can use credit cards abroad and most companies offer rewards and bonus schemes. Plus, protection for payments is a real benefit when it comes to purchases like flights.

On the flipside, if you need to borrow a larger sum or set amount then a loan is probably your best choice. Set repayments mean you don’t lose track of your finances and you’ll get a much better rate of interest on higher amounts. Some of the best loans offer repayment holidays too, meaning you can take a swift hiatus from payments without incurring fees – you can look out for these when you run your loan comparison with us.