Personal loans vs credit cards
Written by
Joe Towner
Reviewed by
Amy LancashireA personal loan gives you a fixed lump sum that you repay in equal monthly instalments over a set term. A credit card gives you a revolving credit limit you can borrow from, repay and borrow again, with flexible monthly payments. As a rule, a personal loan suits large, planned costs you want to clear over time, while a credit card suits everyday spending and smaller, short-term borrowing. Which is right depends on how much you need, how quickly you'll repay it, and how much flexibility you want.
What's the difference between a personal loan and a credit card?
Feature | Personal loan | Credit card |
|---|---|---|
How you borrow | One lump sum, paid into your account | A revolving credit limit you can reuse |
Interest | Usually a fixed rate for the whole term | A variable rate, though 0% deals exist |
Repayments | Fixed monthly payments over a set term | A minimum payment each month, then as much as you want to pay off |
Works for | Large, planned expenses and debt consolidation | Everyday spending and short-term, flexible borrowing |
End date | A set date when the loan is repaid | No set end date |
Access to funds | The full amount, once | Up to your limit, as required |
How does a personal loan work?
A personal loan is an unsecured loan: you borrow a fixed amount, usually from £1,000 upwards, and repay it in equal monthly instalments over a term that's typically one to seven years. The rate is normally fixed, so your payments stay the same and you know exactly when the loan will be paid off. Because the amount, term and payments are set at the start, a personal loan can be suitable for a one-off cost you want to budget for, like a car, home improvements or consolidating other debts.
How does a credit card work?
A credit card gives you a credit limit you can spend up to. Each month you get a statement and have to make at least a minimum payment, but you can pay more or clear the balance in full. If you pay it off in full each month you usually pay no interest. If you carry a balance, interest is charged at the card's rate, which is variable. Some cards offer 0% introductory periods on purchases or balance transfers, which can make short-term borrowing cheaper if you clear the balance before the deal ends. Cards suit everyday spending and smaller costs where you value flexibility. Read more about how credit cards work and how credit card interest works.
Is a personal loan or credit card cheaper?
It depends on how much you borrow and how long you take to repay it.
For a larger amount repaid over a set period, a personal loan usually has a lower interest rate than a credit card's standard rate, so it often works out cheaper.
For a smaller amount you can clear quickly, a credit card can be cheaper.
The interest payments on a credit card will build up if you only make the minimum payment and keep spending.
The figure to compare is the APR, which is the yearly cost of borrowing including fees. It helps to understand the difference between APR and the interest rate before you compare. This is a general comparison, not a quote: your actual rate depends on your circumstances.
Which is better for debt consolidation?
For debt consolidation, both can work. A personal loan rolls what you owe into one fixed monthly payment. A 0% balance transfer card moves existing card balances to one card with no interest for a period, which can be cheaper if you clear it before the deal ends. The right choice depends on how much you owe and how quickly you can repay. Here's what debt consolidation is.
Does a personal loan or credit card affect my credit score differently?
Both appear on your credit file and both can help or harm your score in similar ways. Applying involves a credit check which can briefly lower your score as well as missed payments. The main difference is how the balance is judged. With a credit card, lenders look at your credit utilisation, which is how much of your limit you're using; a high balance relative to your limit can lower your score. A personal loan is instalment debt, so utilisation doesn't apply in the same way, and the balance simply reduces as you repay.
Should I choose a personal loan or a credit card?
Choose a personal loan if you:
need a larger, fixed amount for a planned cost
want a set monthly payment and a clear end date
are consolidating debts into one payment
Choose a credit card if you:
are spending on everyday or smaller purchases
want to borrow and repay flexibly
can use a 0% deal and clear the balance before it ends
FAQs
here are a range of financial products available that may suit your needs. We encourage you to research your options carefully and consider seeking independent financial advice before making any decisions. This blog is for informational purposes only and does not constitute financial advice.
