Credit cards vs personal loans

If you want to borrow money, applying for a credit card or personal loan are two options that might be available to you.

There are many factors to think about before considering either option, such as the amount you’re looking to borrow, or the time you’ll need to pay it back.

Also, credit cards and loans both work very differently; so one may be better than the other in certain scenarios.

Things to consider first

It’s important to understand the costs involved with any kind of borrowing. As well as the original balance, you’ll also have to pay back any interest or fees.

Before borrowing, you should also consider:

  • How much you can realistically afford to pay back
  • Whether you really need to borrow money.

Credit cards

What is a credit card?

A credit card is a physical card that allows you to borrow money to pay for goods and services and to pay it back at a later date (usually with interest added). They’re often used for smaller purchases.

Find out more about how credit cards work.

Credit card features

  • You have flexibility to spread the cost of the things you buy
  • They can be used for lots of different purchases
  • They can be used to withdraw cash (though you may be charged a small fee for this)
  • You can transfer an existing credit card or store card debt often allowing you to pay off the debt at a lower interest rate or even interest-free
  • You’ll be given a credit limit that may be reviewed on a regular basis
  • Repayments will be made monthly (though you may be charged if you don’t repay when you’re supposed to)
  • You can choose to pay any amount between the minimum payment and the full balance (though the more you repay, the less interest you’ll be charged)
  • You won’t pay any interest if you pay off your balance in full each month.

An example of when it might be better to apply for a credit card

Scenario: You’d like extra money to help pay for your weekly food shops, and know you’ll be able to pay this back once you get paid your monthly wage.

In this scenario, a credit card might be a better option than a loan. If you pay off your total balance in full each month, you won’t have to pay any interest. You can also use a credit card on the go, which would be useful for regular purchases (like food shops).

Personal loans

What is a personal loan?

A personal loan is a type of loan that allows you to borrow a fixed amount of money. You then pay it back in instalments over an agreed period of time.

Personal loan features

  • They’re usually used for larger purchases, such as a new kitchen or car
  • Money is paid into your bank account upfront
  • You pay back the money over an agreed amount of time (usually a year or longer, depending on what the lender offers)
  • You start paying interest from the day you receive the money
  • You can usually choose how much you’d like to borrow, and the number of months you’ll take to pay it back (though this would be at the discretion of the lender)
  • The longer you take to pay it back, the more interest you may pay overall.

An example of when it might be better to apply for a personal loan

Scenario: You’d like to borrow £7,000 to pay for a new bathroom. You’d ideally like to pay this off over a longer, set amount of time, with regular and structured repayments.

As they’re designed to be paid off over a longer period of time, and because they allow predictable monthly repayments, applying for a personal loan might be a better option than applying for a credit card in this instance.

Important things to remember

If you find yourself in financial difficulty after taking out a personal loan or credit card, contact your provider as soon as possible. They may be able to support you with an alternative repayment plan.

You can also get free help and advice from independent organisations such as Citizens Advice, StepChange and Turn2Us.

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