Personal Loan vs. Credit Card: Which Fits Your Financial Needs?

Short on funds? Personal loans and credit cards present two go-to ways to secure additional money now that you can pay back with interest later. Both provide accessible routes to gain extra financial flexibility today that you settle in installments down the road.

However, there are some key differences between personal loans and credit cards that you'll want to weigh when deciding which is better for your needs.

What Are Personal Loans?

A personal loan represents a structured installment loan, requiring repayment over a predetermined term. These loans are accessible through a range of sources, including banks, credit unions, online lenders, and various financial institutions.

The loan amount, interest rate, fees, and repayment terms are agreed upon upfront. Personal loans are versatile, ranging from $1,000 to $50,000. These loans are frequently used to consolidate high-interest debt, fund major purchases or home enhancements, tackle unforeseen expenses, or provide financial backing for special occasions like weddings.

When you choose a personal loan, you gain access to unchanging fixed interest rates, guaranteeing rate stability throughout the entirety of your loan's lifespan. This arrangement affords you the convenience of establishing a steady monthly payment. Personal loan durations usually span one to seven years.

Selecting a shorter term results in a speedier loan payoff, albeit with elevated monthly payments. On the other hand, opting for longer terms yields reduced payments at the cost of incurring greater overall interest.

What Are Credit Cards?

Credit cards are revolving lines of credit used to make purchases, take cash advances, and transfer balances from other cards. Every card has a credit limit—the maximum you can charge on the account.

When you make a credit card purchase, the card's issuing bank first provides the funds for that transaction. You are responsible for paying back the total owed balance along with interest and additional fees per your card's agreement. Minimum monthly payments are mandatory; however, you can pay over the minimum if desired.

Credit cards provide the benefit of buying now, paying later. You can use them over and over—as you pay off your balance, your available credit frees up again, so you can keep charging up to your limit. Rates vary based on market conditions, so your APR may shift up or down over time.

Comparing Key Factors

When weighing personal loans vs. credit cards, here are some key factors to compare:

Interest Rates: Personal loans have fixed rates, while credit cards have variable interest rates. This means personal loan rates are predictable, but credit card rates can increase or decrease over time.
Fees: Credit cards often charge annual fees, balance transfer fees, cash advance fees, foreign transaction fees, and late fees. Personal loans typically only have origination fees.
Credit Check: Applying for either will trigger a hard inquiry and impact your credit score. However, taking out a personal loan only requires one credit check, while applying for multiple credit cards means multiple hard inquiries.
Long-Term Costs: Personal loans accrue interest over a fixed term. With credit cards, you might stay in debt indefinitely if you only make minimum payments. This can increase the total interest paid over time.
Access to Funds: Personal loan funds are distributed upfront in one lump sum. Credit cards provide revolving access to your credit line as you pay your balance.
Usage: Personal loans are best for large, one-time expenses. Credit cards are good for everyday spending flexibility.

Carefully weighing the key factors lets you determine which lending option best matches your financial situation and spending needs.

Which Option Is Better for Debt Consolidation?

A popular use for both personal loans and credit cards is combining multiple high-interest debts into one monthly payment. This debt consolidation approach can simplify your finances and potentially lower your overall interest costs.

In some cases, a personal loan may be the better option for debt consolidation because:

You can get a lower fixed interest rate than your current debts or credit cards.
You have a clear path to becoming debt-free by the end of the loan term.
Your monthly installment payment may be smaller compared to minimum credit card payments.
Personal loans don't allow additional spending that would add more debt.

However, a balance transfer credit card may be better if:

You can be approved for a 0% initial APR on transfers that last between 12 and 21 months. This feature aids you in paying off your debt without worrying about piling up fresh interest. You want the flexibility to reuse the card after paying off the transferred balance.

If you don't qualify for 0% financing, the ongoing variable rate on a credit card balance will likely outweigh the fixed rates of a consolidation loan.

Which Option Is Better for Funding a Large Purchase?

Financing a large purchase like an engagement ring, furniture, or medical procedure is another common use for personal loans and credit cards. Here are factors to consider when choosing which to use:

Interest Rate: Personal loans often offer lower rates, saving substantially on interest over time.
Payment Flexibility: Credit cards allow you to pay over time. Personal loans require fixed monthly payments.
Purchase Protection: Credit cards provide more robust purchase protection if damaged, lost, or stolen items.
Cost Oversight: You know the total repayment amount with a fixed-term personal loan. Credit cards risk accruing more in interest costs.
Rewards: Some credit cards offer cash back, points, or miles that can offset some of the purchase cost. Most personal loans don't offer rewards.

For expensive purchases, the lower rates and fixed payment schedules of personal loans often provide better value. But a credit card could be the way to go if you need payment flexibility or purchase protection.

When Are Credit Cards a Better Choice Overall?

For everyday spending, building credit history, and accessing convenient benefits, credit cards have some clear advantages:

You can spread out payments over weeks or months rather than need the cash upfront like with debit.
Rewards credit cards essentially let you earn money back on the purchases you'd be making anyway.
Credit cards build your credit history as you demonstrate responsible usage and payment.
Perks like purchase protection, extended warranties, rental insurance, and free hotel stays provide added benefits.
Credit cards give you fraud coverage in the event your information is taken. This means you are not accountable for bogus expenses made without your consent.
Contactless payment options like Apple Pay provide convenience and secure shopping in stores.

Just be sure to pay your balance off in full each month and avoid costly interest charges. Put your rewards earnings toward statement credits to offset some of what you owe.

When Are Personal Loans a Better Overall Choice?

In some financial situations, personal loans provide advantages:

Interest rates on personal loans are usually considerably lower than on credit cards. This saves substantially on interest expenses when you need to borrow a large amount.
Unlike credit cards, personal loans offer a definitive end date when your loan will be fully paid off. This gives you a "light at the end of the tunnel" moment to look forward to.
Borrowing limits on personal loans can be higher than many credit cards. This allows you to fund large expenses.
Personal loans don't carry the risk of the temptation to overspend that credit card access provides. The lump sum helps avoid this behavior.
No risk of variable interest rates spiking your monthly payment like credit cards. Personal loan rates are fixed for the full term.

Just be sure to only borrow what you can reasonably afford to repay. Avoid payday loans and car title loans with excessive rates.

Choose Wisely For Financial Success

Determining whether a personal loan or credit card is the better pick comes down to examining your own unique financial circumstances. A careful, impartial look at the advantages and disadvantages of each can lead you to the smarter borrowing choice.

Match the offerings to your scenario so you take charge of your money matters. Make the best selection, and position yourself for a positive financial future.