Should you take out a loan or use a credit card?

Advice from the experts at MoneySuperMarket

Mid adult man and a young woman using a laptop and holding a credit card

When it comes to borrowing, which is better – a loan or a credit card?

Both can do the job of providing you with the necessary funds, but each has its pros and cons. So whether you're looking to, say, get a new car, pay for a holiday or make home improvements, here's some factors to take into account before you decide which is right for you.



Bigger amounts at great rates

With a personal loan you can, generally, borrow more you'd get on a credit card.
And the rates on loans are more competitive than ever, especially for amounts between £7,500 and £15,000.

Take HSBC, for example. It is charging 3.3% APR representative on loans in this range, borrowing over one to five years.

Also competitive is Cahoot, which is offering 3.4% APR representative on loans between £7,500 and £20,000, over one to five years.

More flexibility

With a loan, you decide how long you want to borrow for, so if you borrow a large amount, you can spread your repayments over several years to make them more manageable.


Small loans are expensive

If you're borrowing a relatively small amount – say, £3,000 – the rates are often much higher than for larger sums.

If you borrowed £3,000 from Sainsbury's Bank over one to five years, your interest rate would 7.5% APR representative – twice the rate for a £7,500 loan.

Fees can fox flexibility

If you're circumstances permit, you might decide it's a good idea to pay off your loan early. But if you do this, you might have to pay a penalty charge of, say, two or three months' interest.



Long 0% deals

If you're using a credit card to buy something, you can choose one which offers a long 0% introductory rate on purchases – up to 27 months – meaning you don't pay interest for that amount of time.

So if you pay off what you owe during the introductory period, you won't pay interest on your borrowing whatsoever.

For example, the Post Office Money Matched credit card has a 0% rate on purchases for 27 months (if you use the card within three months of getting it, otherwise the 0% interest-free period is reduced to 16 months).

After 27 months, the card charges 18.9% pa (variable), which makes it important to clear the balance in time if you can. The card has a representative rate of 18.9% APR (variable)*.

Cash transfers

There are credit cards which allow you to transfer money directly into your current account, and again, the interest rates charged can be attractive.

The Tesco Bank's Clubcard Credit Card for Balance Transfers and Money Transfers, for example, has a 40-month 0% introductory rate for money transfers, so long as they are carried out within 90 days of getting the card.

But it's not free money. There's a fee of 3.94% of the cash amount, and if you haven't cleared the debt by the end of the introductory period, you'll be charged interest of 20.62% pa (variable). The card has a representative rate of 18.9% APR (variable)*.
Note that this offer ends on April 28, 2016.

Enhanced protection

Under 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.
Say you ordered a TV costing £750 and the shop you bought it from went bankrupt before it was delivered, you'd get a full refund from the credit card provider.


Interest charges

Many of the most attractive credit card deals only work if you pay off the debt and clear your balance within a certain timeframe – otherwise you would start paying a high rate of interest on the outstanding debt.

Low minimum payments

If you choose to pay back the minimum amount each month, it take you longer to clear your debt and you'll pay a lot more interest. So while the minimum payment might be alluring, try not to be seduced if it means you're going to be in debt and paying interest for a longer than necessary.

Get smart with Smart Search

MoneySuperMarket's Smart Search tool gives you an idea of how likely you are to be accepted for a loan or credit card before you apply, without leaving a trace on your credit file.
This matters because applying for a financial product in the normal way – and being declined – can degrade your file and make it even harder to get credit in the future.

*Representative Example: If you spend £1,200 at a purchase interest rate of 18.9% pa (variable), your representative rate will be 18.9% APR (variable).

All credit cards and loans are subject to status and terms and conditions. Over 18s, UK residents only. Terms and conditions apply. See for further information.