Credit cards and personal loans are the two most popular forms of credit in the UK and, their respective categories combined, include the majority of the hundreds of financial products offered by banks, credit unions and alternative and online lenders.

In addition, they both encompass the most affordable interest rates and fees on the market - put simply, you won't find a more affordable way to borrow than by taking out a credit card or personal loan - if done correctly and used appropriately. It can be quite challenging to decide between these two very appealing options if you haven't, at some point, taken out both or, have been exposed to sufficient information. In this article, we're going to examine these two financial products by looking at which expenses or purchases warrant the use of a credit card and which would be more efficiently settled using a personal loan.

What are the similarities between credit cards and personal loans?

Personal loans and credit cards actually have a lot in common - for one, they are both typically unsecured forms of debt - meaning that you don't typically need to offer your home up as collateral to obtain the credit. This does make these two forms of credit more expensive than secured credit options, since the lender won't have a way to recover their money, in the event of non-payment. Secondly, and as already mentioned, they both make up the majority of credit products on the market - just think of all the different credit cards available and all the various personal loan offers - from vehicle financing to debt consolidation - personal loans cover most large ticket financial needs! Thirdly, they both offer the most affordable rates - just about every bank and credit union you can think of offer personal loans that carry single-digit interest rates while, the majority of credit card products offered by all the leading lenders in the UK, will have 0% interest offers.

How much do you need to borrow?

If you're looking for a bigger loan - a personal loan will serve you best. Personal loans can offer large amounts up to £20,000 (and more) and can be used for a wide range of purposes including the purchase of a card, debt consolidation, home improvement and to pay for a wedding or holiday. By using a debt repayment calculator you can determine how much you can afford to lend, based on your monthly income. If it will take you in excess of 18 months to repay the amount based on the monthly repayment you can comfortably afford than, a personal loan will be best. For smaller loan amounts below £2,000 that you can afford to pay within 18 months - a 0% interest purchase credit card will be cheaper.

Budgeting, Flexibility and Benefits

With a personal loan - you will be given a lump sum of money which you will have to pay off (with fixed interest), over the course of a fixed loan term. This makes budgeting very easy since the borrower knows exactly how much they will have to repay on a month to month basis. On the other hand, credit cards offer a revolving line of credit - which means you will be offered a credit limit from which you can make an unlimited number of withdrawals. Each month you must pay off the outstanding balance on your card or, the minimum repayment. A credit card is, therefore, more unpredictable since the amount you pay on a monthly basis will depend on how much you spend - and since the temptation is always there, most people usually spend more than they can comfortably afford to pay.  

If you don't intend to make any particular purchase - or to transfer existing debts onto a 0% interest balance transfer credit card - and want quick access to cash in the event than an unexpected emergency comes up, a credit card can be just the safety net that you need. In addition, most credit cards offer you rewards and bonuses for your everyday or regular purchases and allow you to  buy things online, rent cars, book hotel rooms and more. These range of benefits and usage flexibility can, obviously, not be obtained from a personal loan.

In conclusion - which type of credit is right for you?

To summarize - Notwithstanding, the 0% interest on purchases offered by many credit cards, a personal loan will carry a lower interest rate and APR. This is mainly a result of the fact that the loan term on a personal loan is longer than the 0% interest free period on most credit cards which varies between 12 and 18 months. This makes the use of a personal loan ideal for larger loan sums. When it comes to making smaller purchases that can be paid off within a short period of time, for everyday purchases and for use as a personal safety net - a 0% interest credit card is ideal.