How to Find the Right Borrowing Option: Personal Loans, Credit Cards and Overdrafts Compared
Published 4th of September 2012·Updated 19 April 2026
Reviewed by: Reviewed for accuracy April 2026
The right borrowing option depends on how much you need, how quickly you can repay it and what you are using the money for. Personal loans suit large, planned purchases where you want fixed monthly repayments. Credit cards suit short-term spending you can clear within a few months. Overdrafts are best for minor, brief shortfalls. Choosing the wrong product can cost you significantly more in interest.
Short Summary
Personal loans, credit cards and overdrafts are all unsecured forms of borrowing, meaning they are not tied to an asset such as your home. They differ in interest rates, flexibility and repayment structure.
For large purchases, personal loans typically offer lower interest rates than credit cards, with fixed monthly repayments that make budgeting straightforward.
For everyday spending and short-term borrowing, a 0% purchase credit card allows you to spread the cost interest-free, provided you clear the balance before the promotional period ends.
Overdrafts should be used only as a short-term buffer. Unauthorised overdraft fees can be extremely costly, and even authorised overdraft rates often exceed 35% EAR.
What are the main borrowing options available to UK consumers?
| Borrowing type | Best for | Typical interest rate | Repayment structure |
|---|---|---|---|
| Personal loan | Large planned purchases (£1,000 to £25,000+) | 5% to 15% APR (varies by credit score) | Fixed monthly payments over 1 to 7 years |
| 0% purchase credit card | Planned spending you can clear within 12 to 21 months | 0% for promotional period, then 20% to 30% APR | Flexible; minimum payment required monthly |
| Standard credit card | Short-term spending cleared monthly | 20% to 30% APR | Full balance or minimum payment monthly |
| Authorised overdraft | Short-term cash flow gaps | 15% to 40% EAR | No fixed schedule; reduces with deposits |
| 0% balance transfer card | Moving existing credit card debt to pause interest | 0% for 12 to 30 months (transfer fee 1% to 3%) | Flexible; minimum payment required monthly |
When does a personal loan make sense?
A personal loan is the right choice when you need a specific amount for a defined purpose, such as buying a used car, funding home improvements or paying for a wedding, and you want the certainty of fixed monthly repayments.
Personal loans from high-street banks including Barclays, HSBC, Lloyds and NatWest typically offer rates between 5% and 15% APR for borrowers with good credit. The rate you are offered depends on your credit score, income and the amount you borrow. You must repay the full amount by the end of the agreed term, which protects you from letting debt drift indefinitely.
One important drawback: repaying a personal loan early can trigger an early repayment charge, typically equivalent to one to two months' interest. Check the terms before you commit if you think you may want to overpay.
When does a credit card make more sense than a loan?
A credit card offers flexibility that a loan does not. If you need to spread the cost of a specific purchase and can realistically clear the balance within 12 to 21 months, a 0% purchase credit card is often cheaper than a personal loan because there is no interest to pay during the promotional period.
Credit cards also provide Section 75 consumer protection on purchases between £100 and £30,000, under the Consumer Credit Act 1974. If you buy something on a credit card and the goods are faulty or the retailer goes bust, you can make a claim against the card provider. This protection does not apply to debit cards or personal loans.
When is an overdraft the right choice?
An overdraft is appropriate only as a short-term buffer when a temporary shortfall needs bridging for a few days. Most major banks including Barclays, Lloyds and NatWest now charge a single interest rate on authorised overdrafts rather than daily fees, but rates are typically between 19% and 40% EAR.
Using an overdraft to fund ongoing spending rather than a brief gap is an expensive habit. If you regularly use your full overdraft every month, that is a sign that your income and spending need rebalancing rather than your overdraft limit increasing.
What about buy now pay later schemes?
Buy now pay later (BNPL) services such as Klarna and Clearpay allow you to split purchases into instalments, often interest-free for short periods. These can be a legitimate tool for managing planned spending, but the FCA has raised concerns about affordability checks and the ease of building up multiple BNPL commitments across different providers.
BNPL borrowing was not consistently reported to credit reference agencies until recent regulatory changes. From 2025 onwards, FCA rules require BNPL providers to carry out affordability checks and report to credit agencies, bringing the sector closer to the standards that apply to credit cards and personal loans.
How do I choose between them?
Ask yourself three questions:
- How much do I need? Under £500 points to an overdraft or credit card. Over £1,000 and a personal loan becomes competitive.
- How quickly can I repay it? If you can clear it within a month or two, a credit card or overdraft works. If repayment will take a year or more, a loan or 0% card is more structured.
- What is the total cost including fees and interest? Use a loan calculator and compare the total amount repayable across your options, not just the monthly payment.
If you are unsure which option is right for your circumstances, the Money and Pensions Service runs a free impartial helpline (MoneyHelper, 0800 138 7777) that can help you compare options without any commercial pressure.
Frequently Asked Questions
Is a personal loan cheaper than a credit card?
For larger amounts repaid over one to three years, a personal loan is usually cheaper because the interest rate is lower. For smaller amounts cleared within a 0% promotional period on a credit card, the credit card can be cheaper. Compare the total repayable amount rather than just the headline rate.
Can I use a credit card instead of a personal loan for a car?
Yes, if the purchase is under your credit limit and within your Section 75 protection range (£100 to £30,000). However, credit card rates are typically higher than personal loan rates for amounts over £1,000. A 0% purchase card is an exception; if the 0% period is long enough to clear the balance, it may cost less than any loan.
Does applying for a loan or credit card affect my credit score?
Every formal application generates a hard search on your credit file, which is recorded and visible to other lenders for 12 months. Use eligibility checkers (soft searches) before applying formally to reduce the risk of rejection and unnecessary hard searches.
What is the difference between APR and EAR?
APR (Annual Percentage Rate) is the standard measure used for loans and credit cards. It includes the interest rate plus any compulsory fees, expressed as an annual rate. EAR (Effective Annual Rate) is used for overdrafts and represents the yearly cost of borrowing assuming the debt is held for a full year. Both are useful for comparison, but only compare like with like.
Can I borrow money with a poor credit score?
Yes, but your options are more limited and the cost is higher. Specialist lenders and credit builder products exist for people with impaired credit, but interest rates are typically significantly above mainstream products. Avoid high-cost short-term lenders charging extremely high rates. If you need help assessing your options, StepChange or Citizens Advice can point you in the right direction without charging a fee.