Personal Loan Vs. Credit Card: Which Is Right For You?
Receiving funds as a lump sum as opposed to a credit line is the main difference between personal loans and credit cards, but you must consider all factors. So before jumping in headfirst and applying for the first credit card you see, check out the benefits of getting into personal loan versus credit card debt.
Personal Loans Vs. Credit Cards: A Side-By-Side Comparison
Type of credit
Type of interest
7% – 36% depending on qualifying factors
18% – 25% depending on the type of credit card
Fixed monthly payments over 12 – 84 months
Monthly minimum payments
Origination and late payment fees
Annual fees, transaction fees and late fees
Covering emergencies, consolidating debt or large purchases
Day-to-day purchases, large retail purchases and debt consolidation
Personal Loans Vs. Credit Cards
When comparing a personal loan to a credit card, make sure you note the differences in how you receive funds, required payments and interest rates.
Installment Loan Vs. Revolving Credit
Installment loans and personal loans provide funds in different ways. The best option depends on how you want to use the funds and whether you need them in a lump sum or prefer the ability to draw funds as needed.
- Personal loans are installment loans. Once approved for a personal loan, you receive the funds in one upfront payment. You then repay the lump sum in fixed installments over a predetermined term.
- Credit cards are revolving credit. Credit cards have a revolving credit line that you can reuse. You're provided a fixed limit but can borrow from it continually up to that limit. You must make minimum monthly payments but can use the funds again as you repay the borrowed amount.
Fixed Loan Payments Vs. Monthly Minimums
The credit card versus personal loan decision should also consider the repayment requirements, as they differ significantly.
- Personal loans: Lenders charge a fixed interest rate and repayment period for installment loans. Your monthly payments never change, and you can borrow the funds for 12 – 84 months, depending on the amount borrowed.
- Credit cards: Credit card companies charge variable interest rates, meaning the interest rate can change monthly. There isn't a fixed monthly payment; you can make the minimum payment, usually 1% – 2% of the balance or any amount greater than the minimum payment.
Fixed-Interest Rates Vs. Variable-Interest Rates
Consider the interest rates when choosing between a personal loan versus a credit card. Personal loans have fixed-interest rates, whereas credit cards have variable rates.
- Personal loans: A significant benefit is the fixed interest rate. Many lenders offer lower interest rates on personal loans than credit cards because of the fixed monthly payments and terms. You also can't reuse funds with a personal loan, so it's less risky for lenders.
- Credit cards: Credit card interest rates fluctuate often based on market rates and personal factors, such as your credit score or how you use the funds. For example, purchases have a lower interest rate than cash advances in most cases.
What Can You Use A Personal Loan For?
Borrowers can use a personal loan for most purposes, but some reasons are better than others.
Cover Emergency Expenses
Lenders can often fund personal loans quickly. They’re good for a sudden emergency, such as a home, auto or medical emergency, and you receive the entire amount in one lump sum.
Fund A Large Purchase
A personal loan may save you money for large, necessary purchases, such as home appliances, electronics or other household needs. In addition, you'll have a predictable monthly payment and interest rate, pay less interest over the life of the loan and eliminate debt faster.
Debt consolidation is a popular reason to use a personal loan. They usually provide a lower interest rate, saving money and paying off debt faster. The less time you carry a balance, the less you pay in interest. There is also only one monthly payment to manage.
Cover Home Improvements
Home improvements can dent your budget, but a personal loan can help. Receiving the funds in one lump sum makes it easy to negotiate rates with contractors and get the best deal. However, if you have home equity, you may qualify for a lower interest rate with a home equity loan or line of credit (HELOC).
What Shouldn’t I Use A Personal Loan For?
Lenders restrict personal loan funds to specific expenses, including:
- College tuition or paying off existing student loans
- A house or car down payment (these require secured loans)
- Business expenses
What Can I Use A Credit Card For?
While you can use credit cards for large purchases or emergency expenses, it can be cost you more in the long run. Credit cards make the most sense in the following situations.
Credit cards are best for everyday purchases, especially if you pay the balance off monthly. Some credit cards offer travel or reward programs that provide perks for using the card.
The key is not to charge over 30% of your credit limit and to pay the balance down or off as quickly as possible to ensure it doesn't hurt your credit score and to reduce the amount of interest you will pay over time.
Some retail credit cards to major stores offer an alternative to personal loans. Retailers may offer low introductory rates, sometimes even 0% financing, for a limited time, acting like a personal loan. Pay close attention to the terms because you'll likely have to pay the balance off within a specific period to avoid accruing interest or before the interest rate increases.
If you have credit cards with a high interest rate, a balance transfer card may offer a lower interest rate, sometimes even 0%, making it easier (and faster) to get out of credit card debt. However, before choosing this option, be sure you understand the terms. There may be a balance transfer fee, usually 3% – 5% of the credit card balance.
Credit Cards Vs. Personal Loans: Application Process
Applying for a personal loan is a little different than applying for a credit card. Both are unsecured loans, so you don’t need collateral, but the application process for personal loans may take slightly longer.
What Do Lenders Look For?
Lenders and credit card companies will perform a hard credit pull when applying for personal loans versus credit cards. This allows them to examine your credit history and score to determine if lending to you is a reasonable risk.
Lenders and credit card companies will also calculate your debt-to-income ratio to ensure you have a manageable amount of debt compared to your current income. However, personal loan lenders will look more closely at your DTI than credit card companies. Personal loan lenders will also ask for proof of income, assets and employment before determining if you qualify for the loan.
Personal Loans: Pros And Cons
Choosing between a personal loan and a credit card is a big decision, but weighing the pros and cons of personal loans can help.
- A lump sum of money shortly after approval
- Fixed monthly payments make budgeting easier
- Lower interest rates compared to credit cards
- Fixed loan term allows you to ensure the debt is paid off promptly
- Higher APRs if you have bad credit
- Fixed monthly payments require higher payments that can be harder to afford
- No option for rewards
- No ability to reuse the funds as needed
Credit Cards: Pros And Cons
Credit cards have pros and cons to consider as well when choosing between a credit card and a personal loan.
- Flexible and easy for everyday purchases
- Potential to earn rewards
- Responsible credit card use can build your credit
- Purchases can be interest-free if paid in full monthly
- Higher APR compared to personal loans
- Some vendors charge convenience fees or don’t accept all credit cards
- Possibility to overspend, accruing more debt than you can handle
- Some credit card companies charge annual fees
Alternatives To Personal Loans And Credit Cards
If you are a homeowner and have built equity in your home, one of the following options may be a better choice. You may secure lower interest rates, better terms or be able to borrow more money depending on your home's equity. Most borrowers can get up to 80% of their home's value.
Home refinancing options require a lengthier application process but may provide more favorable terms.
The Bottom Line
Choosing between a personal loan versus a credit card is a big decision, but a personal loan usually has more benefits. For example, with fixed-interest rates and monthly payments, you don't put yourself into endless debt or risk overspending because you have an available credit line.
If you need money fast, have decent credit, and can afford the monthly payments, consider getting started with a personal loan today.