Personal Loans vs. Credit Cards: How They Compare

Young woman reviewing finances with laptop, calculator, credit card, and notepad
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Personal loans and credit cards are both popular tools for borrowing. But it’s critical to understand the pros and cons of each type of loan. Doing so can help you save money on interest charges and prevent debts from lingering for too long.

We’ll cover the details of each loan below, but it may be helpful to start with a general rule of thumb:

  • Credit cards are typically a good option for short-term debt that you can pay off within one year. Better yet, pay off your balance within the 30-day grace period to avoid interest costs entirely.
  • Personal loans make sense for larger loans that require a longer repayment period. The extra time to repay results in smaller monthly payments that are easy to predict, but you might end up paying significant interest costs by taking several years to repay your debt.

The devil is always in the details, so you need to review the specifics of each loan available to you and evaluate the big picture. For example, if you have excellent credit, you might be able to “surf” your debt using multiple interest-free credit card offers—and pay zero interest over several years.

With that in mind, let’s compare how personal loans compare to credit cards.

Personal Loans: The Details

Personal loans are one-time loans that you receive in a lump sum. Lenders often send funds directly to your bank account, and you can do whatever you want with the money.

Lump-sum loans: When you use a personal loan, you receive your entire loan amount at once. You typically can’t borrow more after that, although some lines of credit allow for additional borrowing. The benefit of a one-time loan is that there’s no way to overspend when temptation strikes (like you might with an open-ended credit card loan).

Repayment term: Personal loans typically last three to five years, but longer and shorter terms are available. The longer you take to repay, the smaller your required monthly payment will be. But a low payment isn’t always ideal because stretching out repayment can lead to higher interest costs—effectively raising the price of whatever you borrow for.

Monthly payments: Your required monthly payments are typically fixed (you pay the same amount each month until you pay off the debt). A portion of each payment is your interest cost, and the rest of the amount goes toward repaying your debt. To see how that process works and understand your interest costs in detail, learn how amortization works and run your loan details through a loan amortization calculator.

Where to borrow: Personal loans are available through several sources, and it’s wise to get a quote from at least three lenders. Try different types of lenders, and compare the interest rate and processing fees for each loan.

  • Banks and credit unions are traditional sources for personal loans. Those institutions typically evaluate your credit scores and monthly income to determine whether or not to lend to you. Especially if you have a limited credit history (or problems in your past), try small, local institutions to improve your chances of getting a good deal.
  • Online lenders operate entirely online, and you apply with your computer or mobile device. Those lenders have a reputation for keeping costs low and using creative ways to evaluate your creditworthiness and make approval decisions. If you don’t fit the traditional ideal profile (a long history of flawless borrowing and a high income), online lenders are certainly worth a look. Even borrowers with high credit scores can get a good deal. Be sure to include peer-to-peer lenders in your search.
  • Specialized lenders provide personal loans for specific purposes. In the right situation, those loans may be an excellent alternative to taking on long-term credit card debt. For example, some lenders focus on infertility treatment and other medical procedures.

How Credit Cards Compare

Like personal loans, credit cards are unsecured loans (no collateral is required). But credit cards provide a line of credit—or a pool of available money—to spend from. You typically borrow by making purchases, and you can repay and borrow repeatedly as long as you stay below your credit limit.

Good spending tools: Credit cards are well-suited for purchases from merchants. You benefit from robust buyer protection features when using a credit card, and your card issuer typically won’t charge you fees when you pay for goods and services.

Not ideal for cash: When you need cash, personal loans are often better than credit cards. Credit cards offer cash advances, but you typically have to pay a modest fee to withdraw cash, and those balances often have higher interest rates than standard credit card purchases (plus, those debts get paid off last). Convenience checks and balance transfers allow you to borrow a significant amount without making a purchase, but watch for up-front fees.

Potentially toxic rates: Credit cards have the potential to charge extremely high interest rates. Unless you have great credit, it’s easy to find yourself paying over 20 percent APR. Even if you start with attractive “teaser” or promotional rates, those rates eventually end. If you end up paying high interest rates, you’ll find that the monthly minimum payments hardly make a dent in your debt—and whatever you borrowed for will end up costing significantly more.

What’s more, credit card interest rates are variable, while personal loans often provide predictability with fixed rates.

How to borrow: Credit cards are available through banks and credit unions, and you can also open an account directly with a card issuer.

Credit Cards vs. Personal Loans

Repayment time: With personal installment loans, you know exactly when you’ll be debt-free. As long as you make every required payment, you pay off the loan at the end of the term. Credit card debt can stick around for an uncomfortably long time, especially if you make minimum payments.

Credit building: Both types of loans can help you build credit, so the factors above should be the primary drivers of your decision. That said, credit cards are revolving debt, while personal loans are installment debt. One isn’t necessarily better than the other for your credit score—the main thing is that you use debt wisely. However, having a variety of different types of debts (some revolving and some installment) may help to increase your scores.

Which is best? To decide which type of debt is best for you, dig into the details of each loan available. Gather information such as the interest rate, annual fees on credit cards, and origination fees on personal loans. With that information, calculate your total cost of borrowing.

Consolidating debt? If you’re evaluating loans for debt consolidation or managing student loans, you may have additional options besides credit cards and personal loans. See more details about those consolidation strategies.