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Credit cards vs loans: funding options explained

If you want to borrow money or need to make sure you have money available there are a couple of common paths you can take – two of which are credit cards and personal loans.

Things to think about before you borrow

When it comes to borrowing, one of the first things you need to consider is what you can afford. 

Over time, you need to pay:

  • the balance – the amount you originally borrowed
  • any interest payable – an extra percentage charged every month, or year
  • any fees and charges applied

It's also important to know that any prospective repayments of over 12 months will impact the amount you may be able to borrow for a mortgage.

Credit cards and personal loans compared

Credit cards are a line of credit that offer:

  • flexible borrowing – you can spend any amount up to a set limit
  • flexible repayments – at the end of the statement period you can pay off an amount between the full balance and the compulsory minimum payment (the more you repay the less interest you’ll be charged)
  • introductory interest rates – there may be an interest-free period for purchases, however interest will then be charged if you don't pay off your balance within this period
  • lower limits – generally credit cards provide lower borrowing limits than personal loans, so larger borrowing needs may be constrained
  • security – under Section 75 of the Consumer Credit Act, for purchases between £100 to £30,000, your card issuer will help you get your money back if your seller doesn't deliver your goods, or goes bankrupt, and there are checks to make sure it’s actually you using the card

Personal loans are a way to make a big upfront purchase that offer:

  • a set amount – you can borrow the amount you need for a project or purchase
  • a fixed term – you pay the money back in instalments over a set time (often several years)
  • predictable interest rate and repayments – if you opt for a fixed-rate loan, your interest rate can be set at one rate for the entire repayment period
  • higher loan amounts – may allow for larger borrowing needs than credit cards

When it may be suitable to apply for a credit card

Scenario 1: You’re looking to borrow a smaller amount that you can repay within the interest-free period.

Let's say you need to spend £1,000 to go to a family member’s overseas wedding. If you're confident you'll pay back £100 every month, you should pay off the debt within a year. If you opt for a credit card with 0% interest on purchases in the first 18 months, you'll pay no interest at all.

However, if you find yourself outside the 0% interest period, or using the credit card to buy other things, you may have to pay interest and the interest rate may be higher than on a personal loan.

Scenario 2: You don’t need to use the money for anything urgent, but want it on hand in case of an emergency.

Having a credit card, rather than a personal loan, in this instance means that you won’t pay any interest unless you use the money.

When it may be suitable to apply for a personal loan

Scenario 1: You need to borrow a larger amount that you would like to repay over several years.


Scenario 2: You would like structured, regular repayments.


Scenario 3: You would like to lock in your interest rate for the term of the personal loan.

Let's say you need to spend £6,000 to install a new kitchen. 

You can afford to pay back £2,000 per year, so you agree with your lender to repay the loan over three years. You'll pay interest, but it's usually lower than credit card interest and you have structured repayments so you can include them in your monthly budget knowing they won’t change.

What else do you need to know?

Other borrowing options are available. Take a look at more ways to borrow.

Too many applications could indicate to lenders you're struggling for money. 

If you just want to compare rates, ask your lender to do a 'quotation search' instead of a 'credit application search'. This means it won’t show up on your credit profile.

Explore more: Hard vs soft credit checks: what's the difference?