Should I get a credit card or a loan?
Are you unsure whether a personal loan is better than a credit card? Whilst a credit card is ideal for those who want to spend every month and pay back the amount, a personal loan allows you to receive a large amount up front to spread the cost of higher value purchases.
It all depends on how you would prefer to borrow money, but if you’re new to the world of borrowing you can find yourself in quite a pickle. Thankfully, the Guru is good at getting people out of pickles. Instead, he recommends cucumber slices on the eyes and a relaxing soak in the bath, followed by a bit of light research so you can make an informed decision.
So, once you’ve removed your cucumber slices, carry on reading our short guide to help you make up your mind when deciding between a credit card and a loan.
Loan or credit card?
If you’ve had either of these products before, it might help in your understanding of what each one is, but it’s still important to figure out which one would be the most suitable for you.
Despite being two separate financial products, they both perform the same function, which is to allow you to borrow money and spread the cost of paying it back over a longer period. The big difference is that a loan provides a large amount up front, whereas a credit card provides you with a balance for you to pay off every month as you spend.
This is usually the biggest differentiator when making your mind up about a credit card or a loan, as getting a large amount up front will allow you to make a significant purchase. However, if you want to make several significant purchases, you might still have trouble deciding which product would suit your needs.
Questions to help you decide
A good way to make your decision is to ask yourself a number of questions to establish exactly what you need to get out of borrowing money. This will shed light on whether a credit card or a personal loan would be best for you.
- Do I need to borrow money? – chances are you will have a clear idea of why you want to borrow money already, and what you would like to purchase with it. It’s a bad idea to borrow without a clear idea of what you want to do with the money
- How much should I borrow? – whether it’s for a home loan or to pay for a car, you will need to calculate the total so you know exactly how much you need to borrow
- Can I afford to make monthly repayments? – it’s important to ask yourself whether you can even afford to make repayments in the first place. If you are already stretched every month, you might want to think about ways you can save money instead of getting a credit card or loan
- How long will it take me to repay? – this will normally be answered by finding out the total amount you need, while looking into how much you can afford every month
- Am I eligible to apply for a credit card or loan? – you might have a financial product in mind, but it’s no good applying if you aren’t eligible. Find out your eligibility using our moneymatcher for cards or moneymatcher for loans
- How is my credit rating? – if you aren’t eligible it could be down to your credit rating. Double check your credit history by checking out your credit report, or take steps to improve your credit score before you apply
Getting the answers to the questions above might make it easier for you to figure out whether a credit card or personal loan will suit you more.
For example, if you want to buy furniture for a new house but are happy to make multiple purchases over 2 years rather than all at once, a credit card with a low APR or 0% might be ideal. On the other hand, if you want to buy a new car as soon as possible, a personal loan would be much more appropriate.
Credit Card vs Personal Loan
Another way of making the choice between a credit card or a loan is to highlight the pros and cons of both, just to see which one you would prefer when borrowing money.
Credit Cards Pros
- Credit cards can come with 0% interest periods which means you can borrow without paying interest, as long as you pay it off before the interest free period ends
- You receive protection under Section 75 of the Consumer Credit Act for purchases between £100 and £30,000 – just in case your item is damaged or the company you ordered from closes down
- Some credit cards come with rewards and benefits such as membership points, air miles or cashback, which give you a little more for your money
Credit Card Cons
- Interest payments can soon mount up if you spend a lot on the card. Many credit cards meant for those with bad credit will also have a high interest rate too
- If you fail to make monthly payments you will have to pay penalty charges and it could damage your credit score. If you fail to pay back the full amount you could be hit with a CCJ, which might stop you from accessing funds in the future
- You won’t usually be able to borrow a large amount on a credit card, compared to a loan
- The advertised rates are always subject to status, so there is a chance you might not get what you apply for
Personal Loan Pros
- You can usually borrow larger amounts with a loan, so they are useful when it comes to making a higher value purchase
- A longer repayment term means that you can spread the cost of a loan from just a few months to several years, allowing you to juggle finances more freely
- With a loan, you agree an amount in advance rather than being offered a credit limit with a credit card so you always know if it’s suitable and how much you’ll pay back
Personal Loan Cons
- You will always pay interest on a personal loan, meaning you can’t get away with borrowing for free like 0% credit cards. The interest is exceptionally high on short-term loans that are meant for those with bad credit
- If you miss a payment you will be penalised with further charges or a CCJ for failing to pay back the amount in the agreed time. You can even be penalised for paying the loan back too quickly, as you have already agreed to pay a certain amount of interest
- There can be more risk attached to a loan, especially with a secured loan that is linked to an asset such as your home or car. If you fail to repay the lender can repossess the asset
Getting a credit card instead of a loan
Getting a credit card will allow you to take advantage of flexible borrowing and spending. Credit cards come with added protection from Section 75 of the Consumer Credit Act, rewards such as cashback just for using the card, and you can even get away with paying no interest with a 0% card.
However, as you’re free to spend flexibly every month, if you don’t keep track of your spending you are just making problems for yourself down the line. Poor money management with a credit card can quickly lead to large interest payments and it can also damage your credit score, limiting your access to financial products in the future.
Get started by reading getting your first credit card with confidence.
Getting a loan instead of a credit card
Getting a personal loan will provide you with a lump sum payment that you can then spend as you wish. Your monthly repayments will include interest that has been added as part of the loan offer, and your payment schedule will already have been organised for you to pay off the entire amount over a number of months and years.
However, unlike a 0% credit card, you will always pay interest on a personal loan, meaning that you will have to factor this in when thinking how much you would like to pay overall. You are also under pressure to meet the loan repayments every single month, or you will risk paying more through penalties.
Written by Robert Bester
Updated on 19th November 2019
Published on 25th September 2018