Personal Loan vs. Credit Card

In a perfect world, you’d have the cash to cover any expenses that come your way. 

But because this isn’t the case for everyone, you might look into personal loans and credit cards to pay for them. Both options can help you out, but you may wonder when to use one over the other. Below, we’ll dive deep into personal loans vs. credit cards so you can make the most informed decisions for your unique spending habits and situation. 

Credit card vs. personal loan: Important differences 

The main difference between credit cards and personal loans relates to how you receive the funds. Credit cards offer a revolving line of credit you can withdraw funds from whenever you’d like, up to your credit limit, which is based on your credit and other factors. 

Personal loans, on the other hand, are considered installment loans that provide a lump sum upfront. Once you spend your loan funds, you must apply for another personal loan to access more money.

With a credit card, you have the option to make a minimum payment every month. You can also repay your balance in full and avoid variable interest charges, which fluctuate based on market factors. When you take out a personal loan, you’ll make fixed payments for a predetermined term, which often ranges from two to seven years. You’ll know exactly when you’ll pay it off.

Credit cards may come with annual fees, foreign transaction fees, and late payment fees, and many personal loans charge origination fees and late payment fees. Several credit cards and personal loans advertise minimal to no fees.

	Personal loan	Credit card
Best for	Large one-time purchases	Everyday spending
Type of financing	📅 Installment loans offering a lump sum of money you repay over time	🔄 Revolving credit, meaning you can borrow money as needed up to a set limit
Interest rates	Fixed interest rate for the life of the loan	Variable interest rate on any unpaid balance
Repayment terms	Fixed payments for a predetermined term (often 2 – 7 years)	Revolving payments with a minimum due each month
Fees	Origination & late payment fees	Annual & late payment fees

When are personal loans better than credit cards? 

In certain situations, personal loans make more sense than credit cards. A personal loan is likely a better fit to:

• Cover emergency expenses: If you have a car repair, medical bills, or another unexpected expense, a personal loan can come in handy. Depending on the lender and when you apply, you may get the funds that same day, within 24 hours, or in a few business days. You won’t wait long to cover an emergency. 
• Pay for a large purchase: A personal loan can make it easier to fund part of or all of a large purchase, such as furniture, home appliances, or a home improvement project. You can get quick funds and repay them in predictable monthly payments, often over several years.
• Consolidate debt: Debt consolidation through a personal loan may be a solid option if you have high-interest debt. You may be able to lock in a lower interest rate than your current rates, so you can save money on interest and simplify the payoff process.
• Know exactly how much money you need: Because a personal loan gives you a sum all at one time, you may benefit from it when you know how much cash you need to cover various planned expenses. For example, if it costs $3,000 to repair your car, you can take out a personal loan for $3,000 and avoid overborrowing. 

When are credit cards better than personal loans? 

Sometimes, credit cards are a smarter choice than personal loans. A credit card may be worthwhile for:

• Everyday purchases: Chances are you have smaller day-to-day expenses, such as gas, groceries, clothing, restaurant meals, and entertainment. Credit cards can help you cover them and can be an excellent option if you can repay your entire balance every month and avoid interest. A credit card is a safer, easier alternative to cash, checks, and other traditional payment methods. 
• Retail financing: Some online and brick-and-mortar stores offer retail credit cards to help customers pay for purchases. Some of these cards offer low rates or even 0% financing for a limited time. If you go this route, try to repay your balance before you accrue interest or the interest rate increases. Retail credit cards are only valid at the stores they’re designed for, so you can’t use them anywhere else. 
• Balance transfers: A balance transfer credit card may be your best bet if you have good-to-excellent credit and other credit cards with high interest rates. You may secure a low or 0% rate, transfer your credit card balances, and repay your credit card debt to save money on interest. Most credit card issuers charge a balance fee, which might be between 3% and 5% 
• Rewards: Many credit cards come with rewards, such as cash back and travel points. If you feel confident you can repay your balance in full every month and would like to earn rewards for purchases you’d make anyway, reward credit cards may be your best bet. If you find a card with an annual fee, be sure the perks outweigh the fee.

Pros and cons of personal loans vs. credit cards 

As with all financial products, personal loans and credit cards have benefits and drawbacks you should consider, including: 

Personal loans

Pros

• Lower interest rates

  Compared to credit cards, personal loans often come with lower rates. This is particularly true if you have solid credit. A lower rate can save you hundreds or even thousands of dollars in interest charges. 

• Fixed monthly payments

  Most personal loans have fixed rates and set monthly payments. You’ll know exactly how much you’ll howe every month and can budget for your payments accordingly. 

• Fast funding

  With a personal loan, you can get a large sum quickly. Depending on the lender and when you apply, you may collect the funds that same day, within 24 hours, or in a few business days. Online lenders are known for the fastest funding.

Cons

• High rates for bad credit

  If you have no credit or bad credit, you may struggle to find a personal loan with a low interest rate. Many bad-credit personal loans come with high interest rates, often in the triple digits.

• Potential fees

  With a personal loan, you may be on the hook for fees in addition to interest charges. These could include origination fees and late payment fees. Fees will increase your overall cost of borrowing.

• May need collateral

  Most personal loans are unsecured, but some are secured and require collateral, such as your house, car, or savings account. If you fail to make your payments, the lender can seize your collateral. A home equity line of credit (HELOC) is an example of a secured loan that uses your home as collateral. 

Credit cards

Here are the benefits and drawbacks of a credit card.

Pros

• Flexible funding

  A credit card is a revolving line of credit. You can use it to pay for purchases at any time as long as you don’t exceed your credit limit. If you use the card responsibly, you may even qualify for credit increases and have access to more funds.

• Potential for interest-free purchases

  As long as you pay off your credit card balance in full every month, you won’t owe interest. Interest-free purchases can save you significant money in the long run.

• Access to perks

  You may enjoy a 0% APR promotional period or rewards, such as cash back and travel points. Some credit cards also offer unique perks, including free credit score monitoring and financial planning.

Cons

• Potentially high interest charges

  You can choose to make the minimum monthly payment, repay your entire balance, or anything in between. If you don’t repay your credit card balance in full every month, you’ll rack up interest charges. 

• Annual fees

  Some credit cards charge annual fees. Depending on the card, these can range from $95 to $500 or even more. It’s smart to make sure the perks offset the annual fee before you sign up for a credit card that has one.

• Risk of overspending

  The convenience and ease of a credit card can make it easy to spend more than you can afford to pay back. Credit card debt may take a serious toll on your finances.

Should you use a personal loan or credit card to consolidate debt? 

If you’re facing multiple high-interest debts, you may want to consolidate them with a personal loan or balance transfer credit card. By consolidating, you can simplify the payoff process because you only make one payment each month. You don’t need to keep track of multiple debts with different repayments and due dates. Debt consolidation may also save you money on interest charges and make it more affordable to become debt-free.

Whether this makes sense for you depends on your situation. First, check your credit score to find out where you stand. If you have fair credit or bad credit, debt consolidation through a credit card may not be an option. Balance transfer credit cards, which you can use to consolidate debt, tend only to be available to those with good-to-excellent credit. 

With a shaky credit history, a personal loan might be your only choice. If you opt for a personal loan, shop around and get quotes from at least three different lenders. Many lenders will allow you to prequalify and check your offers without any impact on your credit. Compare all your offers, and choose the one with the lowest interest rate and most favorable terms. Ideally, this rate will be lower than the rates you’re paying on your other debts. 

If you have strong credit and qualify for a balance transfer credit card, you’ll need to transfer all your credit card debts to the card and pay a balance transfer fee of 2% to 5% of the total transfer amount. Do the math, and make sure your potential savings outweigh the fee. If they don’t, or if most of your debt isn’t credit card debt, you may be better off consolidating with a low-interest personal loan.

Personal loan or credit card: Which is right for you? 

Whether you’d be better off with a personal loan or credit depends on your unique circumstances. Before you decide, ask yourself why you need the funds, how much you’d like to borrow, what your credit looks like, and when you want the money. The answers to these questions can help you zero in on the right financing solution.

If you have good credit and hope to pay for a kitchen remodel, for example, shopping for the best personal loans is likely the way to go. A credit card might make more sense if you have smaller everyday expenses or hope to earn rewards. Keep in mind that personal loans and credit cards are not mutually exclusive. You can use both in different situations. 

FAQ

Which is more risky: a credit card or personal loan?

In terms of financial risk, it can depend on your personal habits and circumstances. Credit cards might bring more risk because they often have higher interest rates, and the potential for overspending can be tempting. 

Personal loans can offer fixed interest rates, fixed repayment terms, and a set monthly payment, which may make them less risky.

Does a personal loan or credit card affect your credit score?

Personal loans and credit cards can affect your credit score. Payment history, which includes your ability to make consistent on-time payments, accounts for a significant portion of your credit score. Both types of credit contribute to your payment history. 

A credit card also affects your credit utilization rate, which can have a significant influence on your credit score. If you max out your credit card or use too much of your limit, it can lower your score.

Will I pay more interest with a credit card or a personal loan?

Usually, you’ll pay more interest with a credit card than a personal loan. Average credit card interest rates often outpace those of personal loans. The variable nature of credit card interest rates, coupled with late payment penalties, can also increase costs over time. 

However, many personal loans include origination fees. If a personal loan offers a lower rate, you could save on interest payments compared to using a credit card.