Personal Loans vs. Credit Cards: What's the Difference?

It's more than just how they're paid out to you

Young woman reviewing personal loan and credit card finances
••• marrio31 / Getty Images

When it comes to borrowing money, personal loans and credit cards are both popular tools for doing so. But while they may help you achieve the same goal, they function quite differently. For example, personal loans are paid out in one lump sum, while credit cards are a revolving line of credit.

It’s critical to understand how each type of loan works when deciding which is right for you. Doing so can help you save money on interest charges and prevent debts from lingering for too long.

What's the Difference Between a Personal Loan and a Credit Card?

Personal Loan Credit Card
Best for long-term loans Best for short-term loans
Typically one-time loans paid in a lump sum Typically a revolving line of credit
Best when you need cash Best when you need to pay for goods or services
Repayment period of five years on average Repay during the grace period before interest is charged
Monthly payments are usually fixed Monthly payments depend on your spending

How They Work

Personal loans make sense for larger debts. They are typically one-time, unsecured loans that you receive in a lump sum. Lenders often send funds directly to your bank account, and you can then do whatever you want with the money.

When you use a personal loan, you receive your entire loan amount at once, so you typically can’t borrow more after that. However, some lines of credit do allow for additional borrowing. The benefit of a one-time loan is that there’s no way to spend above your allotted amount.

Tip

Some lenders, like American Express, can even send the funds directly to a credit card to help you consolidate debt.

Credit cards, on the other hand, are typically a good option for short-term debts. They 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.

Like personal loans, credit cards are unsecured loans, meaning no collateral is required. However, since it's a revolving line of credit, you could be more tempted to overspend.

How They Are Used

Personal loans are often preferable to credit cards when you need cash. While credit cards offer cash advances, you typically have to pay a modest fee to withdraw cash. 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 beware of upfront fees.

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.

When it comes to building credit, both types of loans can help with this. 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 goal is to use debt wisely. However, utilizing a variety of different types of debts (some revolving and some installment) may help to increase your scores.

Repayment Periods

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. After all, stretching out repayment can lead to higher interest costs—effectively raising the total cost of whatever you buy.

Credit cards, on the other hand, are best suited for loans that you can pay off within one year. While there may not be a specific deadline for repayment, keep in mind the threat of interest. Paying off your balance within the 30-day grace period can help you avoid interest costs entirely.

Monthly Payments

With a personal loan, the extra time to repay results in smaller, predictable monthly payments. But you might end up paying significant interest costs by taking several years to repay your debt.

Your required monthly payments are typically fixed, meaning 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.

As long as you make every required payment, you pay off the loan in full at the end of the term. And you'll know exactly when you’ll be debt-free.

With credit cards, you continue making payments as long as you continue making purchases—until all of your debt is paid off. That means that credit card debt can stick around for an uncomfortably long time, especially if you make only the minimum payments.

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% APR. Even if you start with attractive “teaser” or promotional rates, those rates don’t last forever. Additionally, credit card interest rates are variable, while personal loans often provide predictability through fixed rates.

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.

However, if you have excellent credit, you might be able to “surf” your debt using multiple interest-free credit card offers. Then, you would pay zero interest over several years.

Which Is Right for You?

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.

A personal loan may be best for you if you're taking out a long-term loan, you need cash, or you want the stability of a fixed monthly payment.

On the other hand, a credit card might be best if you are looking for a shorter-term loan, you want to use the money for purchases from a variety of merchants, and you plan to pay off your debt during your credit card's grace period.

If you’re evaluating loans for debt consolidation or managing student loans, you may have additional options besides credit cards and personal loans.

How You Can 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 grant you a loan. Especially if you have a limited credit history (or problems in your past), shopping with small, local institutions may improve your chances of getting a good deal.
  • Online lenders operate entirely online, and you apply with your computer or mobile device. These 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 personal loan lenders are certainly worth a glance. Even borrowers with high credit scores can find a good deal.
  • Specialized lenders provide personal loans for specific purposes. In the right situation, these 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.

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

The Bottom Line

Personal loans can be helpful when you need a long-term loan, you want to be paid out in a lump sum, and you want fixed monthly payments. Credit cards might be the best option if you want to have a revolving line of credit that you're able to use again and again over a longer period of time.

Keep the interest rates in mind, as well as what you're using your loan for when deciding which is right for you.