Credit cards and personal loans (also known as unsecured loans) are popular choices for people looking to borrow money. However, with so many different options available, it can be tricky to know which one to select.
Both have pros and cons and can be more or less suited to different scenarios.
Throughout this article we’ll look specifically at unsecured loans. Whilst a secured loan is when you borrow money against an asset you own (like your home), an unsecured loan is not tied to an asset.
Should I get a credit card or loan?
Your decision may depend, in part, on how much you plan to borrow. For smaller purchases, people often use credit cards.
Credit cards offer great flexibility when it comes to monthly repayments. You may choose to pay the whole amount in one go, pay a minimum (often between 1% and 4% of the amount you owe) or any amount in between. This allows you to tailor the payments to suit you. If your income or outgoings typically vary, this can be especially useful.
Some providers may also offer perks such as cashback or loyalty points.
Another reason credit cards are popular is that unlike a loan, credit cards often come with 0% interest for a set period (sometimes this 0% is just on a balance transfer or just on new purchases, so make sure you don’t end up using your card for an unintended purpose). If you pay off your balance in full each month, you can avoid paying any interest even after the 0% period.
However, it’s easy to be caught out. If you only pay off the minimum amount each month, and go past the interest-free deadline, you could suddenly find yourself paying a high amount of interest, which can make it difficult to keep on top of your remaining debt. Most credit cards will calculate your interest charges based on your average daily balance, so the interest compounds and accumulates each day – you’re essentially paying interest on your interest.
Another thing to note: if you do a balance transfer at 0% and then start spending on the card, any monthly repayments will go towards paying off the original balance transfer, not the new spending. So you’ll be paying interest on the new spending.
Also, whilst many credit cards provide an interest-free grace period of around 21 days starting from the day your monthly statement is generated, not all do, so never assume!
Unsecured loans often have a fixed rate so you’ll know what you’re paying each month, whereas credit cards usually have a variable rate. An unsecured loan rate will usually be considerably cheaper than a credit card rate, once any promotional period on the credit card ends.
You can also typically borrow a larger sum of money in one go with a loan, and you’re less restricted on how you spend this money. In contrast, with a credit card, you can only spend this money on goods and services that accept credit cards as a form of payment. It is possible to request a cash advance on a credit card, but this is usually set at a higher interest rate, so it makes sense to avoid this if at all possible. Doing this frequently can hurt your credit score.
However, it’s important to note that if you repay the loan early, you may be charged an early repayment fee. This will depend on the provider and the specific loan you take out so always read the terms and conditions carefully. With a credit card, you have the flexibility to repay the balance in full at any time.
Is a loan or credit card better for my credit score?
When used correctly, a credit card or loan can help boost your credit score as it demonstrates to lenders that you can meet regular repayments on time.
On the other hand, if you borrow money and aren’t able to keep up with monthly payments, this can negatively impact your credit score.
Even applying for a loan or credit card will show up on your credit file, so it’s a good idea to look for providers that allow you to check your eligibility before you apply, to avoid racking up too many failed applications.
Should I pay off loans or credit cards first?
When deciding whether to pay off a loan or credit card, remember to consider when the term of your loan ends, and when the 0% interest rate offer on your card runs out – if that is the type of product you chose.
Assuming that you’re simply looking to pay them off early, it’s generally advised to start with whichever has the highest interest rate or APR.
Should I get a credit card or a loan?
Whether you opt for a loan or credit card will depend on how much you wish to borrow, how you plan to spend it, and how you want to repay it.
If you’re looking to borrow a slightly larger amount and are happy with a fixed payment plan, then consider a loan. If flexibility and convenience are more important to you, a credit card might suit you better. If you do opt for a credit card, remember to always clear the debt on your card before the 0% period ends if you can.
If you are planning to pay your credit card back on time and in full each month, then you won’t see much benefit from a 0% interest card. Therefore, you might be better opting for a credit card that offers you cash back, promotions or travel points.
Whichever you choose, take time to do your research and be confident you can afford to meet the repayments on time.
