Are you in a dilemma between getting a credit card or taking a personal loan? Let us examine and understand the differences and benefits between both.

Credit Card: When you opt for a credit card it is a type of revolving credit. You are allocated a credit limit up to which you can borrow. You with repay the total amount or some and you can borrow again.

Personal Loan: Taking out a personal loan is more structured. A lump sum of cash is received by the borrower and the amount needs to be repaid in instalments with interest within a given period.

Understanding the workings of a credit card

A credit card allows its user to spend money to a preset limit that could vary from a hundred pounds to several thousand. If the balance is cleared every month no interest is charged. If only the minimum due or a part of the balance is paid interest is applied. The APR differs and can be anywhere between 6% – 50%. Most cards charge an annual fee of 18%. Both the credit limit and the APR are dependent on the credit score of the user. To get a credit card with a zero-interest introductory offer it is essential to have a very good credit score. The benefit of using a zero-interest card is the interest will not have to be paid for a specific duration.

The minimum due must be repaid every month. However, just paying the minimum due without reducing the main balance will lead to a large interest in the long term. Ideally, the minimum due along with a small part of the balance should be cleared every month. For this, an auto-debit facility could be set up at your bank every month.

Understanding the workings of a loan

An individual can take a personal loan to clear outstanding debts or make an expensive purchase. This could be as little as a couple of hundred pounds to £50,000 or more. Those taking out smaller loans will have to pay a higher interest while those taking a large loan are charged much less. Both the loan and the APR on it will be subject to the applicant’s credit score. However, there are no special offers available on loans like those on offer with credit cards.

Repaying a loan is done every month for a fixed period known as “the term”. The shorter the term the lower the interest and vice-versa. The lender decides the amount to be rapid every month and it can be done via direct debit. In case of a missed payment, penalty charges are incurred and they may appear on the credit report. Loans can be repaid before the completion period but one or two-months interest is charged as an early redemption penalty.

Which is better a credit card or a loan?

For smaller sums and purchases a credit card is a better choice. It offers repayment flexibility and credit card protection under Section 75 of the Consumer Credit Act. There also are reward points and other perks.

A personal loan is a better option for a large sum of money or an expensive purchase. The interest rate is generally lower than a credit card and a large amount of money can be borrowed. Care needs to be taken to make the repayments on time so that no additional charges are incurred.