Choosing the right way to borrow money can save a significant amount of money in the long-term. At Koyo, we explore the benefits of both, and outline what to look out for when borrowing. 

What are they?  

First of all, it’s important to define the key differences between a personal loan and a credit card. 

  • Personal loans: a loan is where you borrow a cash lump sum which is sent to your bank account. You then repay a set amount; over a period of time you agree to when you apply for the loan 
  • Credit cards: a credit card lets you borrow as much, or as little as you want (up to your maximum credit limit), which you then pay back over time 

When is a personal loan a good option for borrowing?  

  • Need money quickly to spend on an emergency or one-off purchase 
  • Need to repay the personal loan over a longer period 
  • Want to keep repayment amounts affordable 
  • Interest rate and repayment amount is fixed for the term of the loan 
  • Need to borrow a larger amount 

When is a credit card a good option for borrowing?  

  • Some cards offer cashback or other incentives for spending 
  • Need extra protection for a purchase (for example, an online purchase) 
  • Flexible monthly repayments, you don’t mind if these repayments vary  

What different types of credit cards are there?  

There are hundreds of credit cards on the market, and whilst choice is fantastic it can lead to quite a confusing decision – especially if you’re new to credit or borrowing.  

We’re lumping credit cards into the following 3 categories:  

  • Balance or money transfer credit cards: These types of cards enable you to transfer an outstanding balance, or debt, onto a new card. More often than not, the incentive is a lower interest rate, or in some cases, a 0% interest rate bonus period 
  • Cashback or reward credit cards: These types of cards offer you rewards and cashback incentives to spend. The interest rates are high if you don’t pay off your balance in full each month 
  • ‘Bad credit’ credit cards: These cards offer people with a full, but poor credit history, an opportunity to have a credit card. Normally the credit limit is very low and the APR very high

What different types of personal loans are there?  

Personal loans are a little simpler than credit cards. However, it’s important to note the differences between personal loans so you can select the right type of loan for your circumstances.  

  • Unsecured personal loans: These are the most common forms of personal loans in the UK. Approvals are generally rated against your credit history. They tend to have a fixed repayment amount, over an agreed period of time
  • Secured personal loans: These are a less common form of borrowing (unless you’re applying for a mortgage). These loans tend to be secured by collateral such as a house or a car
  • Guarantor loans: These loans are becoming increasingly common in the UK. People who have a poor credit history, or a thin-credit file, can appoint a trusted ‘guarantor’ to step in, in case of missed payments or an inability to repay the personal loan
  • Pay day loans: These types of loans are a form of unsecured personal loan, which is short-term and expensive. It’s typically repaid in full in a lump sum on a borrowers next pay-day. Due to their cost, most borrowers are now seeking alternative ways to access credit

Koyo’s take in a nutshell: 

Be smart. Keep up to speed with what’s happening in the market before committing to borrowing. Different products will suit different situations. Get clued-up on interest rates and charges (for example, some loans charge you for repaying early). Finally, make a monthly budget, so you know what you can afford to borrow – personal loans are great for this, as you have a fixed repayment amount each month to enable better planning.  

  • Loans tend to be better for one-off purchases
  • Credit cards are cheaper if you can pay off your full balance each month
  • Loans offer stability and certainty of repayment periods and amounts  

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