Personal loans and credit cards are probably the two most popular ways to borrow money. But while many people use both throughout their lives, they differ significantly.
A personal loan is a one-time lump sum of money repaid over a set period, usually at a fixed interest rate. A credit card, meanwhile, is a revolving line of credit — you can keep borrowing up to your established limit and, so long as you pay off your bill, keep borrowing again and again.
If you need financing, deciding whether a personal loan or a credit card is the best option means weighing interest rates, fees, terms, funding speed, flexibility and other factors.
How does a personal loan work?
Personal loans are a type of installment credit. Borrowers receive a one-time cash infusion, and the interest rate, monthly payment, and payoff date are all predictable.
You may incur a loan origination or administrative fee, late fees and (less commonly) a penalty for paying off your loan early.
Personal loans don’t offer rewards, but your interest rate could be half that of a credit card — and it remains fixed. Once you receive the loan amount, you can't borrow any more without applying for a new loan. When you pay it off, the loan is permanently closed.
Personal loan pros and cons
Pros
- Lower APRs than credit cards.
- Fixed monthly payments.
- .Higher borrowing limits.
Cons
- Lump-sum payment with no additional funds.
- Require better credit than cards.
- Can come with origination fees of up to 5%.
How does a credit card work?
Credit cards operate as revolving credit, so you can charge expenses, pay them off and charge more, up to your credit limit. You can use a credit card to make purchases, pay bills or transfer balances.
You’ll receive a statement each billing cycle that outlines all purchases you’re responsible for repaying by the due date. If you pay on time, you won't be charged interest. If you don't pay on time, you'll be charged interest and possibly a late fee.
Your credit limit can range from a few hundred to tens of thousands of dollars, depending on your creditworthiness.
While the application process is free, there may be an annual fee, as well as charges for balance transfers, cash advances and foreign transactions. But you may benefit from a rewards program that includes cash back, miles, points, statement credits or memberships.
You may also qualify for a 0% intro APR period, enabling you to pay down debt or make new purchases without accruing interest for months.
The line of credit typically stays open until you decide to close it.
Credit card pros and cons
Pros
- No interest if you pay in full.
Only pay interest on what you spend. - Access to rewards, balance transfer promotions and more.
Cons
- Card may come with an annual fee.
- Failure to pay in full can lead to a higher APR.
- Lower borrowing limit than a personal loan.
Credit cards vs. personal loans: Which is better?
Credit cards and personal loans are both popular ways to borrow but they operate very differently. A credit card may be better for short-term purchases you can pay off quickly, like dinner or a movie, or ongoing expenses you can't put a dollar amount on, like a veterinarian visit or vacation. A personal loan can be the better choice for large expenses you can calculate — like a wedding or home repairs.
The average credit card limit is about $34,000 across all open cards, according to data from Experian. Many banks will approve personal loans of up to $50,000, with some going to $75,000, $100,000 or more.
But it's a toss-up when it comes to debt consolidation: If you get a 0% intro APR offer and have a plan to pay off the balance before the deadline, a card could make more sense. But if you're already juggling multiple bills and need to lower your APR, a personal loan may be the better course.
| Credit cards | personal loans | |
|---|---|---|
| Loan type | Revolving line of credit | One-time lump sum |
| Interest rate | Variable, average is around 22% | Fixed, average is about 12.4% |
| Fees | Annual fee, late fee, balance transfer charge, foreign transaction fee | Origination fee, |
| Repayment schedule | Minimum monthly repayment required, principal can go unpaid indefinitely. | Set monthly payment, with predetermined payoff date |
| Perks | Welcome bonus, cash back, points, memberships | Uncommon, usually rate discount or referal bonus |
| Best for | Smaller, ongoing or unpredictable expenses | Larger, planned expenses |
When a balance transfer credit card is better
A credit card is a better call if you need to pay off a smaller amount and find a card with no annual fee and a low balance transfer fee. A card with a 0% introductory APR period can give you up to a 20-month runway to pay off the balance without accruing interest.
When a debt consolidation loan is better
If you have a large balance and need more time to pay it off, a debt consolidation loan will provide predictability you can work into your budget. In many cases, your lender will send payment to your creditor on your behalf.
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Example: Paying off $5,000 with a personal loan vs. with a credit card
Imagine you plan a family vacation that costs about $5,000 and take out a personal loan with a 12% APR and a 24-month term to pay for it. Assuming a standard amortizing loan with no fees, your monthly payments would be about $235, and you'd pay roughly $650 in total interest over two years.
Now let's say you qualified for a no-fee credit card with a 20% APR and a 4% minimum payment. You could finance the trip for free, as long as you paid the balance in full by the payment due date.
If you didn't, the interest alone would cost you close to $83 that first month. There's also the late fee, which can add roughly $30 a month, depending on the card and circumstances. If it took you 24 months to pay off the vacation, charging it would be a lot more expensive than taking out the loan.
Of course, the math shifts significantly the faster you're able to pay off the credit card balance.
| Credit card | Personal loan | |
|---|---|---|
| Starting balance | $5,000 | $5,000 |
| APR | 20% | 12% |
| Repayment period | 24 months | 24 months |
| Approx. monthly payment | $254 | $235 |
| Approx. total interest | $1,107 | $649 |
| Total repaid | $6,107 | $5,649 |
| Difference | $458 more |
When to use a personal loan
A personal loan is the better option if you:
- Need to borrow a large amount.
- Have good credit and a low debt-to-income ratio
- Want to consolidate multiple high-interest debts.
- Need to finance a large, predictable expense.
- Are confident you can make monthly payments over a lengthy term.
When to use a credit card
A credit card may be the better choice if you:
- Qualify for a 0% APR welcome offer.
- Need to finance a smaller or ongoing purchase.
- Have less-than-perfect credit
- Can pay off your balance in full each month.
- Will benefit from miles, points or other perks
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FAQs
Is a credit card or personal loan better?
It depends on your needs. A credit card is usually better for short-term, flexible borrowing, while personal loans are better for larger, fixed expenses that you want to repay over a set period.
Can I use a personal loan to pay my credit card bills?
Yes, this is known as a debt consolidation loan. It can potentially reduce your interest rate and simplify multiple card payments. To make it worthwhile, however, you should avoid charging more on the card.
Can you pay a personal loan with a credit card?
Most lenders don't allow you to charge a payment on a personal loan, but you could take out a cash advance and use the money to pay the loan. Some issuers also offer balance-transfer checks that could be used for the same purpose. But moving debt from a personal loan to a credit card usually means a much higher APR and increased credit utilization.
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