Personal loans vs credit cards

Personal loans and credit cards are two of the most common forms of borrowing in the UK. Here we look at both options and explain the differences between them.


What is the difference between a personal loan and a credit card?

With personal loans you borrow money upfront before you spend it. You then repay this, plus interest and/or fees, over an agreed period. Usually, personal loans are used for large purchases like buying a car or making home improvements. Many people also use them to consolidate their existing debts because the fixed repayments make it easier to manage and repay debt. Personal loans tend to have a lower rate of interest compared to credit cards. 

Credit cards are less structured. You’re able to borrow up to an overall credit limit, using the card whenever you need to. After you make repayments, you can borrow the money again. Credit cards allow you to make purchases on the go, e.g. in a shop or online. There are many different types of credit cards, from ones designed to be used abroad to credit cards that help improve your credit score.

Personal loans and credit cards do have similarities. For both, your credit score has a major influence on the amount you can borrow and the amount of interest you pay.


Pros and cons of personal loans


  • More suitable for making larger purchases because you agree up front to borrow a set amount of money. In most cases, you can borrow more money with a personal loan compared to a credit card.
  • The cost is clear before you borrow. You know the rate of interest and the amount you will need to repay every month before you take out your loan.
  • Personal loan repayments are structured – you repay the same amount each month and borrow the money over a fixed term.
  • Interest rates for a personal loan tend to be lower than for a credit card.
  • You can repay a loan early, often with no additional fees.
  • Personal loans are drawn down into your bank account, so you can spend it almost anywhere, including places that only accept debit cards, bank transfers or cash.


  • Arranging a loan can be done quickly, but an existing credit card can be used at any time for a purchase. As a result, loans are not as convenient for smaller, unplanned purchases.


Pros and cons of credit cards


  • Credit cards tend to be useful for smaller purchases.
  • They are convenient as they allow you to pay for unexpected purchases because the money is already available to you, up to your agreed credit limit.
  • Credit card repayments are flexible as you typically only need to make a minimum monthly payment – if you are using the card. This means you can be flexible in the amount you pay each month. For example, one month you could pay the minimum payment (usually around 5% of your balance) and the next month pay the whole balance off.
  • Some credit cards offer an introductory low interest offer. If you’re currently paying interest on a credit card, you might be able to get better deal and save money by shopping around and transferring your balance.
  • Credit card providers must protect most purchases worth between £100 and £30,000 under Section 75 of the Consumer Credit Act. This means that if something goes wrong with your purchase, the credit card provider is jointly responsible for making it right.


  • Only making the minimum payment each month will take you longer to repay your debt, meaning the total amount of interest you pay could be more.
  • Effective credit card management requires self-discipline, as it is easier to spend the money than to repay it.
  • Credit card interest rates are usually variable which means the provider can change the rate of interest that you pay, unless you opt out and close the account. Some credit cards also vary the rate of interest you are charged depending on the Bank of England Base Rate.
  • Normally credit cards have lower limits than personal loans, so tend to be not as useful for larger purchases.
  • You might not find out your credit limit on a card until you have already opened the account. The credit limit can go up and down after you’ve taken out a credit card, depending on your usage and repayment history.


Should I get a credit card or a personal loan?

Credit cards are well-suited to borrowing a smaller amount of money (for example, less than £3,000), or when flexibility in the amount borrowed is required.

A personal loan is well-suited to borrowing for larger, planned purchases.

Personal loans may be useful if you want to consolidate existing debt because the structured repayments make it more manageable to repay. With credit cards, the balance can go down with repayments but also up with new purchases, so you need to be very disciplined to reduce the amount you owe.

Before borrowing any money, it is important to make sure you choose the right product for your needs. Some checks you should make before borrowing are:

  • Can you afford the monthly repayments?
  • Where is your overall cost of borrowing cheapest?
  • What is the most suitable way to borrow the money you need?


If you have existing credit cards and/or personal loans, you could consolidate your existing borrowing with a RateSetter loan:

New to RateSetter? A RateSetter personal loan can be used to streamline your existing borrowing into one affordable monthly payment. It could also save you money every month in interest. Find out more

Already have a RateSetter loan? You may be eligible to consolidate your existing borrowing with your current RateSetter loan or take out a new loan. Sign in to your account to get a personalised rate.


If you’re worried about debt, you might find it useful to visit The Money Advice Service which has further information about debt management and offers free debt advice.