Loans and credit cards can both provide you with the funds you need – whether that’s to pay for a new car or home improvements – but they work in very different ways.
Here’s our rundown of the pros and cons of each to help you decide which is right for you.
Lengthy 0% deals – One of the big advantages of many credit cards is they offer lengthy 0% introductory rates on purchases.
Provided you pay off what you owe during the introductory period, this means you won’t have to pay interest on your borrowing.
The most competitive credit cards currently offer 0% on purchases for more than two years. Just be sure to clear your debt before the interest-free window ends.
Money transfers – Several credit cards also allow you to make money transfers directly into your current account, which can be useful if you need a cash injection, and rates are often much lower than if you were to take out a personal loan.
In some cases, you won’t have to pay any interest on this borrowing for three years or more. But be aware transfer fees can be high – often around 4% – and you should try to pay off your balance in full before the 0% deal ends and interest kicks in.
Consumer protection – Thanks to Section 75 of the Consumer Credit Act, when you buy something costing between £100 and £30,000 using a credit card, the card provider is jointly liable with the retailer if something goes wrong.
So, for example, if you ordered a chair costing £150 and the shop you bought it from goes bankrupt before it is delivered, the credit card provider should provide you with a full refund.
Interest charges – You need to be disciplined about paying off what you owe on a credit card as soon as possible (and definitely before a 0% offer ends), or interest charges can soon mount up. Unlike loans, credit cards don’t require you to clear your balance within a certain timeframe.
Low minimum payments – Minimum monthly payments on cards are often set at very low levels. If you only pay this amount each month, not only will it take you longer to clear your debt, you’ll pay out far more in interest. So try to pay off more than the minimum if you can.
Low credit limits – Another downside is that credit cards usually don’t offer particularly high credit limits, so if you need to make a big purchase, you may not be able to borrow the sum you need.
Larger borrowing at great rates – You can usually borrow more using a loan than a credit card.
And the good news is if you’re looking to borrow between £7,500 and £15,000, rates are more competitive than ever. In fact, the most competitive rates now hover just above the 3% APR representative mark.
Greater flexibility – Another advantage of a loan is that you can decide how long you need to repay what you owe. If you’re borrowing a large lump sum, you can therefore choose to spread your monthly repayments over a number of years.
You’ll have peace of mind that you know exactly how much you’re repaying each month, and that at the end of the term there will be nothing left to pay.
Higher rates for smaller sums – One of the biggest downsides of loans is that rates are often more expensive if you are only borrowing a small amount.
If you take out a loan of around £3,000, for example, you’ll currently be charged more than 7% APR representative.
Fees – If you want to pay off your loan early, there may be a penalty charge to do this, which is usually equivalent to two or three months’ interest.
Some lenders also charge arrangement fees, which can increase the overall cost of credit.
Use our Smart Search tool
Whether you choose a loan or a credit card, you’ll probably want to get accepted quickly. And that’s where our Smart Search tool comes in.
It gives you an idea of how likely you are to be accepted before you apply, and it won’t leave a mark on your credit file. This can save you a lot of time when you come to actually apply for the card or loan you’ve chosen.
All you need to do is click on the ‘Find a loan’ or ‘Find a card’ button on our comparison tables, enter details such as your name, income and how much you need to borrow, and you’ll then be shown a list of credit cards or loans along with how likely you are to be accepted for each.
You can read more about this here.
All credit cards and loans are subject to status and terms and conditions. Over 18s, UK residents only. Terms and conditions apply. See MoneySuperMarket.com for further information.