Personal loans and credit cards are some of the most common ways to borrow money in the UK. They’re both very versatile, but each one has its own pros and cons - and using the right one for your requirements can save you a lot of money.
In this article, we’ll explain the difference between the two, before explaining how to choose the right option for you.
If you’re already familiar with the differences between personal loans and credit cards, you might want to skip the article and take a look at some of the options available to you. If so, our loan calculator is a great place to start.
And if you want to know more about personal loans in general, take a look at our complete guide to personal loans.
If not, read on!
Personal loans vs credit cards
A personal loan is very easy to understand. You borrow an amount of money - say, £5,000 - at a fixed interest rate, for an agreed period of time.
You receive it as a lump sum, and pay that money back, with interest, in monthly instalments. Once you’ve made all the repayments, that’s it - you’re done. You can use your personal loan to do just about anything - home improvements, a new car and debt consolidation are all common uses for loans of this kind.
You can get a loan from lots of different sources, including banks, independent lenders and credit unions. If you want to know more, our full guide is worth a read: what is a personal loan?
A credit card is slightly more complex. A lender basically agrees to extend credit to you, which you can use to make purchases. You’ll agree an upper limit, and you can spend on that card up to the limit. At the end of the month, you’ll receive a summary of your spending, and you can choose either to repay the money you’ve spent - which usually means that you won’t pay any interest - or roll some or all of that borrowing over to the next month.
If you roll that borrowing over, you’ll generally pay a high interest rate. Unlike a personal loan, you have to make a certain minimum payment each month, but you can choose to keep most of the balance outstanding - so long as you don’t mind paying interest on it. It’s possible - though not advisable - to roll credit card debt over for periods of many years.
The best rates for both credit cards and personal loans tend to be offered to people with good credit scores, while people with a patchier credit history are likely to have less choice.
Personal loan pros
The main advantages of a personal loan are:
Simplicity: with a personal loan, you know exactly what your monthly payments will be, with interest charges factored in. You’ll know exactly how much is due each month, and what percentage of the loan amount you’ve repaid.
Cost: it’s likely (although not always the case) that you’ll be able to borrow at a lower interest rate using a personal loan than you would with a credit card. There are caveats though, which we’ll cover below.
Amount: you’ll generally be able to borrow a larger amount with a personal loan than you would with a credit card.
Personal loan cons
Unfortunately, personal loans do come with some drawbacks:
Inflexibility: unlike with a credit card, you have to make fixed repayments each month. You can’t choose to borrow more or less part-way through the term of the loan.
Lack of buyer protections: we’ll cover this later, but purchasing goods with a credit card can give buyers additional protections if something goes wrong with the purchase.
Credit card pros
The best credit cards can be great if you want to keep some financial flexibility:
Borrow what you want, when you want: so long as you stick to the agreed credit limit and minimum monthly repayments, you can increase and decrease your borrowing to fit your circumstances.
Buyer protections: if you pay for a purchase with a credit card and something goes wrong, there’s a good chance that your credit card provider will provide some protections - it’s called Section 75, and Which? has a great explanation.
Introductory deals: many credit card companies offer 0% interest on balance transfers and interest-free periods on purchases.
Perks: some credit cards come with extra benefits, such as points which you can put towards flights, or deals and discounts on specific purchases. Card issuers may charge annual fees for these benefits.
Credit card cons
The main drawback of credit cards is that it can be easy for you to lose control of your finances.
Too much flexibility? With a credit card, it can be very easy to go into debt without thinking of the consequences. Although it’s possible to use a credit card without having to make interest payments, credit card companies make lots of money from the many customers who roll over-borrowing from month to month and pay higher rates of interest as a result.
Higher rates of interest: generally, once you’ve gone through any introductory period, you can expect to have to pay a higher rate of interest than you might do with a personal loan - and unless you’re financially disciplined, you might have to pay that interest over a longer period of time, too.
Not always useable: credit card companies charge sellers a fee - as a result, you might find that some businesses won’t accept credit card payments at all.
When to use a personal loan
A personal loan is particularly well-suited to one-off purchases that you want to spread over a longer period. For example, if you’re buying a new kitchen and want to pay it off over a few years, a personal loan can be an effective way of doing that.
It’s something that works well for larger purchases (you’re unlikely to find many personal loans for less than £1,500) and is better suited to those who will pay something off over a period of a few months or years.
When to use a credit card
A credit card is essentially a line of credit, well-suited for smaller, short-term purchases that can be paid off quickly - if you’re a new borrower, you might find that your opening credit limit is in the region of £1,000, and if you pay off the balance each month, you might pay no interest at all. However, if you’re paying it off over a long period, you’ll likely find that a personal loan is the cheaper option, helping you to avoid higher interest rates.
Is a loan or credit card better for your credit score?
This isn’t something that credit bureaus (who decide credit scores) actually disclose.
However, what we do know is that the most important thing is to make payments on time (and this includes paying off your credit card in full every month) - this is the surest way to improve your credit score, and missing payments is the quickest way to reduce your score.
For more information, take a look at our full guide to how a personal loan might affect your credit score.
Is it safer to pay with a credit card?
One definite advantage to paying with a credit card is that you benefit from Section 75 protection. This means that when you make a purchase using a credit card, your credit card provider is jointly liable for any breach of contract or misrepresentation by the company that made the sale.
This protection can be really useful, particularly if you buy something from a retailer who later goes bust, for example. Section 75 covers purchases that come to more than £100, but interestingly you don’t have to have paid the whole balance with a credit card - so you could get protection by just paying the first £100 of a £10,000 kitchen refit with a credit card, for example. This perk only applies to credit cards - debit cards don’t offer this protection.
The catch: not every seller will accept credit cards, and some may charge a premium for allowing you to pay with one.
Is it a good idea to pay off credit card debt with a personal loan?
A common use for loans is debt consolidation, where you take out a new loan to pay off your existing debts. Done right, a debt consolidation loan will save you money: for example, if you’re paying 20% interest on your credit card debt but can pay it off with a loan that carries an interest rate of 10%, you’ll cut your costs significantly.
However, there’s a lot more to it than that - for a full explanation, take a look at our guide, which covers how to consolidate credit card debt.
Are personal loans better than credit card debt?
Koyo offers personal loans, so we’d love to answer this question with an unequivocal “yes”, but the real answer is “it depends”.
A personal loan definitely has some advantages: they’re simple to understand and make it easy to keep on track of your finances and avoid going into further debt. They’re also often cheaper than credit card debt, and allow you to borrow more.
However, good credit cards do have some genuine perks too: you can dip in and out, and make use of low introductory rates and helpful buyer protections. To make your decision easier, we’ve summarised the pros and cons of each below:
Generally cheaper, simple and easy to understand.
No buyer protections, less flexibility (although many providers allow you to repay early).
Planned, large purchases, which you plan to pay off over a period of time.
Flexible (within credit limit), helpful buyer protections and sometimes perks too.
Easy to go into further debt, expensive if you don’t pay it off in full each month. Some sellers won’t accept credit card payments.
Smaller purchases, particularly when you might need extra buyer protection; small, unplanned costs.
The important thing is to shop around, understand your options, and choose the product that best fits your needs.Now that you’ve read our article on personal loans vs credit cards, you might want to take a look at some of the options available to you. Our loan calculator is a great place to start.