credit cardsElaine Thompson/AP/Press Association Images

Traditionally if you wanted to borrow a lump sum for a fixed period your best bet was a personal loan. Credit cards would charge you a small fortune over a long period, so were a distinctly inferior product for this sort of borrowing. However, with plenty of credit cards offering 0% over long periods, it has led some to conclude they'll be better off with a plastic solution to their cash-flow problems.

So which is better?

Your guide to banking



Personal loans

Personal loans have been getting gradually cheaper. At the moment you'll pay around 6% for the cheapest personal loans - assuming you have a squeaky clean credit record. A number of loan companies have been cutting their rates in the last few weeks, including Sainsbury's (which cut 1-3 year loans to just 5.9%) and Yorkshire and Clydesdale (which cut to 6%).

This represents a bit of a bargain compared to much of the period since the credit crisis struck, and is just about the lowest loan rates have been for five years. As a rough guide, if you borrowed £7,500 over two years with Sainsburys, the total cost of the interest over this time would be £457.

Your guide to banking



However, if you want to borrow less than this, the rates become decidedly less competitive. Sainsbury's tops the table again with 7.6% - which would costs you £392 to borrow £5,000 for two years. If your profile is anything less than excellent, you can expect your best rate to be closer to 17%, which would take the interest charges to £859.

Credit cards

Cards, meanwhile, are having a cash-giveaway frenzy. If you are just looking to transfer existing borrowing, there are a host of cards with very long interest-free periods on balance transfers. Halifax and Barclaycard are offering 22 months interest free, while Virgin and MBNA are offering 20 months. You will pay a fee to transfer your money, but it's chicken feed compared to loan interest - at just 2.9% for the Barclaycard deal, 3.5% for Halifax, and 2.99% for Virgin and MBNA.

If you are looking to make new purchases, there are a variety of different cards offering 0% on purchases including Nationwide (offering 17 months), Barclaycard and Halifax (for 15 months) and Natwest, Bank of Scotland, Royal Bank of Scotland and Virgin Money (at 13 months). These also come with fees of around 3%.

On the face of it, for loans of under two years and for less than £7,500, a credit card is a no-brainer. Assuming you borrowed £5,000 with a 3% fee you would pay just £150. They also have the advantage that you can pay them off more quickly if you have the spare cash without paying a penalty.

However, this isn't the full story.

The downside

Stephen Green, Commercial Development Manager of Freedom Finance, warns that:"Recently some commentators have been arguing that it is actually cheaper to take out a low interest credit card rather than a personal loan. Such advice may have a point but only if you know exactly what you're signing up for from the start."

Credit cards have a number of downsides that are worth taking very seriously. First, they may not be practical. When you apply for a credit card you are dependent on the provider offering a credit limit that covers the amount you want to borrow, and there are no guarantees.

In addition, there is no compulsion to pay your debts off during the interest-free period - you can just pay the minimum. It means you need to be disciplined if you are to avoid racking up interest. Similarly, if you get a balance transfer card you may be tempted to spend, and in the process can end up paying a small fortune in interest on purchases.

Green points out: "Low interest credit cards do serve a purpose for those disciplined enough to always make their monthly repayments and those who have undertaken the financial planning to ensure paying off any remaining balance when the low rate period comes to an end.

"Anyone who is unable to meet these requirements should resist the magic 0% credit card as the chances are this will eventually end in increased debts, higher payments and a poor credit rating. In many cases loans may be more suitable, with consumers able to agree to a rate from the start and commit to regular payments via direct debit with the confidence that they will clear the debt at the end of the term of the loan."

The answer to the age-old question of 'what is better: loans or create cards?' Is sadly 'it depends'. If you have an excellent credit rating and are very disciplined a credit card could be the way to go, if you know you couldn't resist the temptation to spend, you may be better off with a loan.

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