Is a personal loan better than a credit card?

Written by

Tara Covell

Thursday 15th July 2021

We all need to borrow money at some point in our lives, whether it’s for a new car, home improvements or to just get our finances in check.

When it comes to applying for funds, the most common options customers choose are either credit cards or personal loans.

Here at Novuna Personal Finance, we’ve looked at the core differences of these two products to help you make the right decision to fit your circumstances.

Before you borrow…

When it comes to applying for personal finance, the most important thing to consider is how much you can afford borrow and if the repayments fit within your budget.

Remember, you’ll need to pay:

  • The balance

  • Any interest payable

  • Any fees and charges applied

What is a credit card?

Credit cards are a line of credit that offer flexible borrowing with flexible repayment options. According to Money Saving Expert, the average credit limit in the UK is between £3,000 and £4,000* but the limit you get will depend on your credit history.

This limit is generally lower than what you can get with a personal loan and you can either pay the full amount shown on your monthly statement or opt for a lower amount. You will still need to pay the set minimum amount if you decide to carry over your balance.

Depending on your credit report, you might be able to qualify for introductory offers such as an interest free period for purchases made with your card, however you will be charged interest if you don't pay off your balance within this time frame or miss payments which usually result in a higher APR.

When should I use a credit card?

Credit cards can be useful for smaller retail purchases or as an emergency back up when something goes wrong e.g. a broken washing machine.

They also provide added peace of mind as they fall under Section 75 of the Consumer Credit Act. This means for any purchases made between £100 and £30,000, your credit card company will support you in getting your money back should the seller, for example, not deliver your goods or files for bankruptcy.

Some providers even offer discounts and cashback for using their card so you could save a bit of money on your weekly shop or get a discount on your next holiday.

What is a personal loan?

A personal loan is a form of unsecured lending which means you don’t need to put up collateral, such as property assets, to be approved for a loan.

This makes them a good choice for making a big upfront purchase as they usually have a fixed rate of interest and fixed repayment terms, letting you borrow in a more structured way and help with budgeting.

Unlike a credit card agreement, you’ll always pay the same amount every month for a set number of months as the amount borrowed and the repayment period are agreed up front.

When should you use a personal loan?

If you’re looking to fund a bigger purchase such as home improvements, a new car, a wedding, a holiday of a lifetime or even just consolidating high interest debts into a more manageable monthly payment, personal loans are a good choice.

As the repayments you make stay the same amount each month, budgeting becomes a lot easier as you know exactly how much you need to pay.

Another advantage of a personal loan is that the repayment term is spread over several years which gives you the flexibility to spread the cost over a longer time frame when compared to a credit card.

Can a personal loan or a credit card impact my credit report?

The short answer is yes – but it could either have a positive or negative affect depending on how you manage your finances.

Both forms of lending can give your credit score a boost providing that you make all of you repayments on time every month for the full term. By doing this, you are showing that you’re able to do a good job of managing your debt.

Keep in mind that both personal loans and credit cards can also hurt your credit report if you make late payments or miss them entirely. This can lead to it becoming more difficult to get finance in the future.

Top tip - If you do choose to use a credit cards, try to keep your credit consumption below 30% of your limit as this demonstrates responsible borrowing to future providers.

How do I make the right decision?

Whichever option you choose, be sure to do plenty of research so that you can make an informed decision that suits both your personal and financial situation.

Take the time to compare different loans and credit cards and pay close attention to interest rates, repayment terms, any additional fees and the total amount you will need to repay to ensure you're getting the best deal.

For more information on all our products, head over to our personal loans page.

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