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Personal Loans vs. Credit Cards: How to Choose
Key takeaways
- Credit cards may appeal to borrowers who value rewards and cashback vs. lower rates, especially if balances can be paid in full each month.
- Personal loans often make more sense when a borrower prefers a fixed monthly payment and payoff timeline.
- Using a personal loan calculator can help you compare payment scenarios before borrowing, making it easier to evaluate your monthly payment and affordability.
When people need to borrow money, two of the most popular options are personal loans and credit cards. Each type has its strengths and ideal applications, based on their repayment structures, payback periods, and interest costs:
- Personal loans provide a lump sum with fixed payments and a clear payoff schedule, making costs easier to predict.
- Credit cards offer revolving access to funds, variable interest rates, flexible payments, and ongoing borrowing. Balances can fluctuate widely from month to month.
Understanding how each option works is vital to choosing the best option for your situation.
What is a personal loan?
A personal loan is a specific amount of money that's borrowed for a defined period of time, usually with a fixed interest rate and stable monthly payments. Banks and other financial institutions lend the money based on the borrower's creditworthiness, which includes credit history and financial stability.
Borrowers can use the money for almost anything they choose, and the loans are ideal for debt consolidation, large purchases and unexpected expenses. The loan amount and repayment terms are decided upon when you are approved for the loan. You'll know how much you need to pay each month and for how long. This makes budgeting simple and predictable, with no surprises.
What is a credit card?
A credit card is a revolving line of credit that gives the account holder a high level of flexibility in making purchases and paying off the debt.
You can use a credit card to draw from your line of credit to make purchases or take cash advances—up to a predetermined limit. As you pay the money back, you can borrow it again and again.
If you pay off the balance each month, you can avoid paying interest. If you carry a balance, interest charges will apply according to the account's terms.
If you make at least the minimum payment each month, you can take as long as you need to pay off your debt. The longer you take, however, the more you will pay in interest charges.
Key differences between personal loans and credit cards
Now that you understand a little more about personal loans vs. credit cards, let's take a close look at the 5 defining differences.
1. Borrowing structure
Personal Loans
- Lump-sum amount. Funds delivered all at once up-front
- Fixed payments. Same payment due every month
- Set payoff date. Loan ends on a specific date
Credit Cards
- Borrow as needed. Access credit when expenses arise
- Payments vary based on balance. Monthly payments rise and fall with your use of the card.
- No set payoff schedule. Debt continues until the balance is fully paid
2. Interest rates
It's easier to calculate the overall cost of a fixed-rate personal loan because interest is already included within the repayment schedule.
Credit cards typically offer variable rates, so they could change as economic conditions change. Compound interest accrues on the revolving debt and keeps building until you pay the card off. Credit cards also may charge one rate for purchases and a higher rate for cash advances. Your rate also could be increased as a penalty for missing payments
3. Fees and costs
Personal Loans
- May include origination fees
- No fees for unused credit
- Typically have no ongoing annual fee
Credit Cards
- May include annual fees
- Interest accrues daily on balances
- Late payment fees
- Cash advance fees
4. Repayment options
Personal Loans
- Fixed monthly payments
- Clear payoff timeline
- Ideal for structured budgeting
Credit Cards
- Minimum payments can extend the debt
- Balance can grow if not monitored
- Flexible monthly payment options
5. Impact on credit score
The way you use each product can impact your credit score.
Personal Loans
- Consistent payments strengthen your credit profile
- The balance counts less in determining creditworthiness
- Approval requires a hard inquiry on your credit report
Credit Cards
- Large balances take up more available credit and increase your credit utilization rate
- Paying on time builds up your creditworthiness
- Keeping monthly balances low can help to raise your score
A personal loan often provides a more disciplined approach to repayment. It may be a good fit for your situation when:
- You’re consolidating high-interest credit card debt. Combines balances into one structured repayment plan so you can simplify your budgeting and spend less on interest
- You want a fixed monthly payment. Monthly amount stays consistent for easier budgeting and possibly using autopay
- You’re financing a large, predictable cost. Works well for one-time expenses
- You prefer a set payoff date. Provides a clear endpoint for repayment
- You’re trying to pay off debt faster and more affordably. Reduces long-term costs through structured repayment
Credit cards work well for everyday expenses and borrowing needs that change month to month. This may be the better loan option when:
- You can pay your balance in full each month. Avoids interest while maintaining borrowing flexibility
- You want rewards like cash back or travel points. Earns benefits on everyday spending
- You need flexible borrowing for changing expenses. Adapts easily as your borrowing needs fluctuate
- You want access to revolving credit. Allows ongoing borrowing without reapplying over and over for loans
- You’re covering smaller or short-term costs. Better suited for limited, temporary expenses
Personal loan vs. credit cards for debt consolidation
Both personal loans and credit cards can be used for debt consolidation. Prequalification can help you understand the potential options for each one before applying. Here's a comparison of credit card vs. personal loan for debt consolidation:
Personal loans
- Often lower interest rates. Personal loans typically have lower interest rates than credit cards, especially for people with good credit scores. This can lower the overall cost of carrying long-term debt
- Fixed payoff schedule. Debt is repaid within a defined time frame
- Helps you avoid accumulating new debt. You don't have the option of adding to the loan balance
- Can reduce credit card utilization and improve credit. Transferring high-interest rate credit card debt to a personal loan can reduce your credit utilization rate, which could improve your credit score
Credit cards (balance transfer cards)
- May offer 0% intro APR for a limited time. Borrowers may enjoy a temporary repayment period without interest charges or with a low introductory rate
- Useful for paying down debt interest-free. Allows principal reduction without added interest
- Requires discipline to pay off the balance before the intro period ends. To gain the full benefit of the introductory period, pay off the balance before higher interest rates go into effect
FAQs
Personal loans typically often lower interest rates than credit cards, especially for borrowers with strong credit. This makes them a practical option for borrowing larger amounts and knowing what your monthly payments will be for the loan's duration.
Credit cards also tend to offer variable interest rates, while personal loans tend to have fixed rates. That means your credit card interest rate could climb even higher. However, if you pay off your credit card balance every month, you could avoid paying interest.
When you need a large sum of money all at once, a personal loan may be the best fit. You can use the money for almost anything, while a credit card might not be accepted everywhere. You won’t have to worry about your monthly repayment changing because the interest rate and repayment terms are fixed.
A personal loan calculator can help you estimate monthly payments and compare affordability.
In general, credit cards work better for smaller, everyday purchases. Some credit cards, however, offer 0% interest or low-interest introductory periods that could be useful for making a large purchase.
You will need to check on two things first:
- Will you be able to pay off the debt before the introductory period ends and a higher interest rate kicks in?
- Will the credit limit for the account be big enough to cover the purchase?
Yes, you can take advantage of credit cards and personal loans at the same time. Given the popularity of these forms of credit, it's likely that many people who have personal loans also have credit cards.
Your credit history and income both impact which products you will qualify for. Borrowers often use personal loans for home improvements, medical expenses, large purchases, and debt consolidation. Credit cards are a go-to option for everyday spending, smaller purchases, and short-term expenses. Combining the two can provide the flexibility you need for your personal finances.
It’s important to compare personal loans and credit cards based on how each fits your borrowing goals.
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