The Pros and Cons of Credit Cards & Personal Loans

Two of the most common ways of borrowing money in the UK are credit cards and personal loans. Both are versatile, but they come with unique pros and cons, so choosing the right one for your circumstances is important. In this post, we take a look at the pros and cons of each type of borrowing to help you make your mind up on which to go for.

Personal loans vs credit cards

There’s nothing complicated about a personal loan. You can borrow a specific amount of money at a rate of fixed interest that you need to pay back over a specific period of time. The money is deposited into your account in a lump sum, and you can use it for a range of different reasons, including debt consolidation or to buy a new car. You can apply for a personal loan from your bank or from a third-party provider like Koyo Loans.

Credit cards are a little more complex. A lender agrees to offer you credit that you can then use for a range of different purchases. They will stipulate an upper limit, and you will need to pay some of the credit back at the end of each month. If you let some of the total roll over to the next month, you will be subject to interest payments.

Pros and cons of personal loans

Pros:

• They’re simple: You know exactly where you stand with a personal loan. You receive a specific amount of money and know how much is due in monthly repayments.
• Cost: In most instances, you can borrow a personal loan at lower interest rates than a credit card.
• Amount: You can typically borrow more money with a personal loan than you can with a credit card.

Cons:

• They’re not flexible: While you can roll a credit card over, you need to make exact monthly repayments on a personal loan.
• Lack of buyer protection: With credit cards, you receive buyer protection with your purchases that aren’t applicable to personal loans.

Pros and cons of credit cards

Pros

• Flexibility: With a credit card, you can borrow what you want, when you want. You just need to stick to the credit limit and see the minimum monthly repayments.
• Buyer protection: If you buy something with your credit card and something goes wrong, you’re protected by Section 75.
• Introductory deals: Some credit card companies offer a 0% interest period to new borrowers.
• Perks: When you buy on your credit card, you might be eligible for points and cashback deals.

Cons

• Overly flexible: Although the flexibility of a credit card can be a pro, it can also be a con. If you’re not disciplined, it can be easy to get carried away with your spending on a credit card.
• Higher rates of interest: Although there are some exceptions, credit cards usually come with a higher rate of interest than many other types of borrowing.
• Not always usable: Because credit card companies typically charge a fee to vendors, some businesses don’t accept them for transactions.

When should you use them?

Personal loans are ideal for one-off purchases that you want to spread over a specific period of time. For instance, a car or holiday payment would be ideal. On the other hand, credit cards are a quick line of credit, meaning they’re ideal for smaller, short term purchases. If you’re paying something off over the long run, a personal loan is likely to be cheaper due to the lower interest rates.

Which is better for your credit score?

Unfortunately, credit bureaus don’t actually stipulate whether credit cards or personal loans are better for your score. Either way, you need to make sure you make your repayments of both on time, or your credit score will suffer as a result.

The verdict

As you can see, there are pros and cons to both personal loans and credit cards, so you need to think carefully about your reasons for borrowing and how much credit you need. For longer-term purchases, we’d recommend a personal loan, as you’re likely to pay less interest in the long run than with a credit card.