Loans and Credit cards are two of the most common choices for credit. Loans have been traditionally used as a credit option. But recently, we have seen a rise in the popularity and usage of credit cards. So, if you need financial assistance, you may get confused about whether to take a loan or a card.

There are a lot of things to look at! Have you seen the interest rate? Are they at all connected to your bank account? What about a loan from your credit card provider? How will it impact your credit record?

Loan or credit card? Which is better? What’s different?For significant, anticipated purchases like purchasing a home or a vehicle, a loan would be preferable. Cards work best for regular, small expenses like food, clothing, and utility bill payments.

In this article, we will take an overview of loan vs credit card and understand how to decide which one is the better option for your specific needs.

An overview of loans

Loans have been a popular choice among borrowers for a long time and their demand is still intact. In 2022, the size of the personal loan market in the UK was £37.7 billion. Further, the market is growing at the rate of 8%.

Is a personal loan better than credit card debt? Let’s try to understand the key features of personal loans along with their pros and cons to find the answer to this question. Remember, whenever you borrow, make sure to check if you can afford repayments.

Features of loans

When a borrower takes out loans like short term loans, instalment loans, etc, the lender provides a lumpsum amount upfront. The amount is paid back over time in fixed instalments.

A personal loan can be taken out for many different purposes, such as paying for weddings, medical bills, used cars, etc. If you’re using it for large purchases – just make sure you factor in all the costs. Some people apply for personal loans to consolidate all of their debts and commitments into a single loan.

Let’s check out the loan pros:

Pros of loans

• With personal loans, you can borrow larger amounts all at once. It is ideal for costs that call for substantial, one-time payments
• Usually, loan instalments are predetermined and fixed. You can budget your money as you are aware of what you will be paying each month
• The interest rate on personal loans could be lower than those on credit cards.
• To apply for a loan, you do not need to provide collateral. Unless you’re applying for a secured loan.
• A personal loan has a longer repayment period than a credit card. The monthly repayments are over a set period / fixed term. You can usually pay back via direct debit.

Cons of loans

• The repayments of personal loans are not flexible.
• Aside from interest rate, lenders may additionally charge other expenses, such as administrative costs.
• There are no rewards for using personal loans, unlike credit cards.
• If you wish to repay your loan early, you will incur an early repayment fee. But this usually depends on the lender.

Read this blog post to find out how many personal loans you can have at once.

An overview of credit cards

The demand for credit cards is rapidly growing. There were 368.5 million credit card transactions in June 2023, 7% more than in June 2022. The total spend on credit cards in June was £20.7 billion, which was 8.3 per cent higher than in June 2022. The exact credit card that you can get depends on your credit report. Some will require you to have a good credit score. Others might offer features like balance transfers.

Let’s take a look at the features, pros, and cons of credit cards before settling the debate about credit cards vs loans.

Features of credit cards

A credit card is a type of credit facility that permits borrowing up to a preapproved limit. When the borrower makes purchases, pays bills, or does other transactions using the card, the amount they spend is subtracted from their credit limit.

You’ll receive a bill each month that they must pay back. All of your credit card purchases are listed on the bill.

Credit cards typically have variable interest rates. This means that if the base rate changes, your rate could change too.

The majority of card companies offer an interest-free time frame. The borrower is required to pay interest on the borrowed amount if the bill is not paid within the specified time frame. If you can pay back your full balance each month this can mean you aren’t charged interest. If you don’t pay in full, you’ll be charged interest on the remaining balance.

Pros of credit cards

You can borrow money up to your credit limit whenever you need it by using a credit card. Using credit cards is convenient. They are good for everyday spending. The repayments of credit cards are more flexible. After receiving each card statement, you can pay any amount above your compulsory minimum payments. The more you pay back, the lesser will be the interest charged.

Remember – paying only the minimum repayment can mean you pay more money overall. This is because you’ll pay more interest, leading to more total interest.

Reward points are provided by credit card companies to customers who use their cards frequently. Reward points are also awarded for timely bill payment.

Interest will be charged only if the credit limit is used. Also, most companies offer an interest-free period where you can pay your bills without interest.

As per Sec 75 of the Consumer Credit Act, your card issuer will assist you in getting your money back if the merchant fails to deliver the goods or declares bankruptcy. However, this is valid only for purchases between £100 and £30,000.

Cons of credit cards

Credit cards can have very high-interest rates (compared to an unsecured loan). The credit limit can be lower compared to a loan. It depends on your credit score, credit history, and monthly income.

The interest and the card debt keep adding up if you don’t pay your credit card bills on time. This creates a cycle of debt.

The user faces a risk of card stealing and identity theft fraud. According to the 2023 UK Finance Fraud Report, lost and stolen payment card losses are up by 30% to reach £100.2 million.

The user has to carry the credit card everywhere to make purchases.

Click here to find out in detail how credit cards work in the UK.

When should you get a credit card?

1. You need to borrow smaller amounts

If you need to borrow a small amount that you can repay within a short time, you should use a credit card loan vs a personal loan. If you pay back your credit card dues within the interest-free period, you will not need to pay interest on your borrowing.

2. You need a line of credit for emergencies

If you are looking for a credit option that you can use only in emergencies, you should get a credit card instead of a loan.

For example, you can use a credit card for buying groceries and other household items at the end of the month, when you have almost spent your entire salary.

3. You want to build a good credit history

A credit card can be a great way of building a credit history if you have none. You can use the card to improve your credit score as well.

This can allow you to get loans at better terms and a lower interest rate in the future.

Check out this blog post to find out how to use a credit card to build credit.

When should you get a loan?

Is a loan better than credit card debt? In certain situations, it is! You should take a loan vs a credit card in the following situations.

1. You need to borrow a larger amount

Using a loan, you can borrow a larger amount and then pay it back over several months or even years. One-off larger purchases can be paid for with a loan. The credit limits of credit cards are quite low compared to the amount you can borrow through a personal loan. Also, if you use up your credit card limit and pay it back slowly, your interest cost can be much higher than a loan.

2. You want to consolidate your debts

Do you have multiple types of debts like loans, credit cards, and lines of credit, with varying due dates and interest rates? You can consolidate them by taking up a single loan to pay your other debts back. Many people use a loan to pay off their card debt because personal loans have lower interest rates.

3. You don’t need revolving credit

If your credit requirement is one-time, you probably don’t need a card. You can be better off with a personal loan. You can borrow money for your required needs and then focus on paying the loan back through monthly payments.

Final verdict: Credit card or loan: which is better?

The debate of loans vs credit cards can go on indefinitely. The truth is: that each credit option is useful in specific situations. The key is to identify your credit needs and choose the option that suits those needs in the best way.

If you need a large amount quickly, you can get a loan. If you are looking for an ongoing credit option that you can use whenever you need, you can take up a credit card instead.

Frequently asked questions

Disclaimer: The information given above is provided for reference only. This is not financial advice.

Related guides:

How to Spot Payday Loan Scams

What Documents Do I Need for a Secured Loan

Short Term Loan Vs Long Term Loan