Is it better to have a loan, overdraft or credit card?

Christopher Dowling
May 19, 2024

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In a nutshell

Using your savings is almost always better than borrowing money if you can afford it. But if you do need to borrow, loans, overdrafts and credit cards can all be good in different ways.

Desperate to buy something? Don’t have the cash? We know what it feels like. Whether you’re dealing with an emergency repair or you just don’t have enough to last you till payday, we all need a little help every now and again. And while borrowing money isn’t something you should take lightly, choosing the right way to do it can make things a lot cheaper and easier.

Here’s when it’s better to use a loan, overdraft or credit card.

Loan, credit card or overdraft: what’s the difference?

You’ve probably heard of all three. But let’s face it, how many of us actually know what they’re for? Here’s how loans, credit cards and overdrafts work – and when you should use them.


Loans are for borrowing set amounts of money for set periods of time. 

There are lots of different types of loans available. Ever heard of a mortgage, for example? This kind of loan can cover nearly the whole value of a house! Or you may have heard of a personal loan. These typically let you borrow between around £5,000 and £25,000.

Loans are normally for big lump sums, so they tend to come with clear repayment plans. This means you’ll usually pay back the money and interest in set monthly chunks over a number of years.


  • Interest rates are relatively low.
  • Some loans come with fixed interest rates (where the interest is fixed at a set figure).
  • Good for borrowing large sums.
  • Good for long-term borrowing.
  • Can be approved in as little as 24 hours.
  • They come with a clear repayment plan.


  • The longer the duration of the loan, the more interest can build up.
  • May require ‘security’ (this is where a lender can take possession of an asset, like your house, if you don’t keep up your repayments).
  • Repayments aren’t flexible.
  • Can involve fees if you want to repay a loan early.
  • Missing repayments can impact your credit score (making it harder for you to borrow in the future).
  • Missing repayments could land you in court (don’t worry, it’s a last resort!).


Ever wished you could keep spending once your bank account hit £0? That’s what an arranged overdraft is for.

An arranged overdraft allows you to go into a negative bank balance. Normally, you can do this by a small amount for free, but once you spend over a certain amount, your bank will start charging you interest.

Once you’ve been approved for an arranged overdraft, it’s easy to dip in and out of, which makes it perfect if you need to go over budget by a small amount every now and again (normally, you’ll be able to borrow up to £1,000 in this way). That said, the interest rates are pretty high – we’re talking between 19% and 40% APR, which means you’ll be charged between 19% and 40% of the amount you borrow over a year. So, you’ll want to avoid relying on your overdraft or going into it by large amounts for long periods of time.


  • Flexible borrowing and repayments.
  • Easy to take out cash.
  • Good for short-term borrowing.
  • Once you’ve been approved, it’s quick and easy to borrow money.
  • Regularly paying off your overdraft could improve your credit score.


  • Can be tempting to rely on your overdraft for more than just occasional spending.
  • They don’t usually allow you to borrow big sums of money.
  • Interest rates tend to be high.
  • Could be cancelled at any time.
  • Interest is added monthly.
  • Regularly going beyond your overdraft limit could negatively impact your credit score.

Credit cards

We bet you’ve heard the phrase ‘I’ll just put it on the credit card.’ A credit card is a bank card that allows you to buy things and then pay for them later. 

You can spend as much as you need to, up to the card’s limit. The average credit limit in the UK is between £3,000 and £4,000 but this can vary a lot depending on things like your income and credit history – while some limits are as low as £200, high earners could see limits of over £10,000.

If you pay off your full outstanding balance each month, you won’t normally have to pay any interest. This means that credit cards can be good for borrowing for short periods of time. However, if you don’t mind paying interest, you can also use your card to spread out costs over a longer period of time – you’d just have to make a minimum payment each month, which is usually a percentage of what you owe.

Some cards also come with interest-free periods when you first take them out, which means you can avoid paying interest for longer. And some will encourage you to use them by letting you collect rewards each time you make a purchase. This is often in the form of miles or points, but some even offer cashback, allowing you to claim back a percentage of what you’ve purchased in cash. Sounds tempting right?!


  • Most cards let you borrow for free if you pay back the balance each month.
  • Some cards come with introductory interest-free periods (meaning you can borrow for free for a longer period of time).
  • May allow you to collect rewards and cashback when they’re used.
  • Can offer protection when things go wrong (eg. if you’ve paid for goods you didn’t receive or if a product is faulty you may not have to pay).
  • Flexible repayments.
  • Paying it off in full each month can help you improve your credit score without committing to long-term borrowing or paying interest.


  • Interest is added monthly.
  • Interest rates tend to be higher than with loans.
  • Usually takes over a week to get hold of one.
  • Will charge you fees to withdraw cash (pro tip: never do this!).
  • Missing repayments can negatively impact your credit score.

Should I choose a credit card, overdraft or loan?

Good question! It all depends on what your situation is and what you want the loan for. When you’re choosing between the three, here are some key things to ask yourself.

Why do I need to borrow money? 

Are you borrowing because you’ve run out of funds before payday and you need some cash to tide you over? (In which case, an arranged overdraft might be best). Or is it because you’ve got lots of debts and you want to make them easier to manage by bringing them all into one place? (In which case, a loan is probably what you’re after).

Credit cards, overdrafts and loans are all designed for different situations. So, pinpointing exactly what you need them for is the first step to working out which one will be best for you.

How much money do you need?

Try to work out exactly how much money you need to borrow. Once you have a figure in mind, you’ll be able to rule out some of the options.

Looking to borrow a big lump sum? Then you’re probably looking at a loan, although some credit cards could also work for you.

Looking to borrow a small amount to tide you over for a short time? Then you’re probably in the market for an overdraft (which will usually allow you to borrow up to £1,000) or a credit card (which will have an average limit of £3,000 to £4,000).

How long do you need the money for?

Do you know when you’ll be able to pay back the money you’ve borrowed? Or do you want to be able to pay it back whenever?

Overdrafts and credit cards don’t have set end dates, which means they’re a bit more flexible if you’re not sure what’s going on. Just bear in mind that with a credit card, you’ll still need to pay back a set amount every month (normally a percentage of what you owe). And there’s usually a limit on how long you can borrow for without paying interest.

On the other hand, loans are designed to be paid back over a fixed period of time, usually around 1 to 7 years. Spreading out your repayments like this can make them easier to manage. But you’ll also be paying interest for longer, which means you could end up paying more overall.

When do you need the money?

Ideally, you don’t want to rush into borrowing money without giving yourself enough time to think it over and weigh up all the options. But sometimes, needs must – especially if you’re dealing with an emergency like a broken boiler!

If you’re in a rush, an overdraft could be the perfect solution. Your bank will normally be able to set one up in just a few hours. Alternatively, a loan could be a good option as some will be able to give you the funds in under 24 hours.

In contrast, it will normally take between 7 and 14 days to apply for and receive a credit card. Don’t get us wrong, that’s not exactly a long time. But if you’re desperate, a week or 2 can feel like years!

Just beware: any lender will want to be sure you’re going to be able to pay the money back. So if they’re worried, they may want to do further checks or get more info, which could slow down the process.

Overdraft vs loan

Let’s get to the nitty-gritty: Is it better to use an overdraft or loan? Well, that all depends on what you need it for. Here’s when it’s best to use each one.

  • Short-term expenses: Overdrafts are generally better for short-term expenses like doing a food shop the day before payday. If you only need to dip into your overdraft by a small amount, you could avoid paying interest.
  • Big one-off costs: Loans are usually better for big one-off purchases like buying a car. They tend to cover bigger amounts and they come with clear repayment plans.
  • Emergency or backup funds: Overdrafts tend to be better-suited for borrowing unexpectedly, like if you need to cover vet fees or a broken boiler. Once you’ve been approved for one, you can dip into it whenever you like.
  • To consolidate debt: Loans are generally best for consolidating debts (which is what it’s called when you have lots of different debts that you bring into one central place). By gathering all your debts in one place, you could make them easier to manage and potentially less expensive, as interest rates on loans tend to be lower than on overdrafts and credit cards (unless you’re in an interest-free period).

Overdraft vs credit card

Okay, but is an overdraft better than a credit card? Well, it depends. In some situations, yes, but in others, not so much. Here’s the lowdown.

  • Short-term expenses: Both overdrafts and credit cards can be good for short-term expenses. Just bear in mind that you’ll be charged interest if you go over your agreed interest-free amount on an arranged overdraft. Similarly, you’ll have to pay interest if you don’t pay off your credit card in full each month (unless you’re on an introductory interest-free period).
  • Big one-off costs: Credit cards are usually better than overdrafts for borrowing big lump sums as they can cover larger amounts (however, a loan might be even better depending on your situation).
  • Emergency or backup funds: Both overdrafts and credit cards work well for backup funds. However, you’ll usually be able to get approved quicker for an overdraft, so if you’re in a rush and you haven’t already set one up, an overdraft could be your best port of call.
  • To consolidate debts: If we had to pick between overdrafts and credit cards for consolidating debts, it’d probably be credit cards. By putting all your debts in one place, you’ll make them easier to manage. However, loans are best-suited to this as interest rates tend to be lower (assuming you’re not on an interest-free period with your credit card) and they come with a clear repayment plan.

Credit card vs loan

Finally, what’s the deal when it comes to credit cards vs loans? Is one better than the other? Here’s a quick summary.

  • Short-term expenses: Credit cards are generally better for short-term expenses than loans are. If you repay the balance in full each month, you can usually avoid paying interest. The same goes if you’re on an introductory interest-free period.
  • Big one-off costs: Both credit cards and loans can work well for big lump sums. A loan will usually be the cheaper option as interest rates tend to be lower. That said, some credit cards will give you an interest-free period. So, if you can pay back the money before this runs out, a credit card could be a good choice.
  • Emergency or backup funds: A credit card is normally the better option if you need emergency or backup funds. Once you’ve been approved for a credit card, you can use it whenever you need to and you won’t have to pay any interest if there’s nothing on the card. This makes it perfect for use as a backup.
  • To consolidate debts: Loans are usually best for consolidating debts. They come with clear repayment plans, often spanning a number of years, that will make your debts easier to manage and ensure you’re debt-free by the end. Interest rates on loans also tend to be lower than on credit cards (even though credit cards can come with introductory interest-free periods, these only last for a limited time). 

Over to you

Let’s be honest: if you can afford to use your savings instead of borrowing money, that’s probably going to be best. That way, you’ll avoid paying any interest and you can rest safe in the knowledge that you’ve only spent what you can afford. But this isn’t always going to be possible!

If you do need to borrow money, here’s what really matters: you’re now a total pro when it comes to the benefits of loans, overdrafts and credit cards! So, no matter what your reason is for borrowing, fingers crossed you’ll now know how to do it properly, saving you time and money in the long run.

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