You’ve heard the old advice that it’s always best to save—and it’s true. But that’s not always possible, and for those times, you might need to decide which type of financing wins in the battle between a personal loan vs. a credit card.
Both options can help you get the money you need, but under very different terms. Depending on your financial goals and standing, one might be a better option than the other.
Key Differences: Credit Card Vs. Personal Loan
The biggest difference between credit cards and personal loans is that they involve different types of credit.
Credit cards are revolving credit, which means you can borrow money as you need it, and your payments are based on how much your outstanding balance is at a given time. Personal loans, on the other hand, are installment loans, in which you receive your money in a lump sum, and then repay the loan in even payments over time.
These two differences help drive the rest of the characteristics of these loans:
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When You Should Use a Personal Loan
Personal loans usually are best for when you have large, one-off expenses like car repairs or home improvement projects or if you’re consolidating high-interest debt into a single loan with a lower interest rate. According to a 2019 study from the credit bureau Experian, people took out personal loans to:
- Fund a large purchase—28%
- Consolidate debt—26%
- Pay for home improvements—17%
- Refinance existing debt—9%
- Pay for something not listed above—30%
Personal Loan Advantages
The biggest advantages of personal loans vs. credit cards is that they usually offer a lower interest rate and steady, even payments until you pay the debt off. This predictability makes it easier to build your budget, and you know exactly when you’ll be out of debt.
Personal loans also have a wide range of uses—just about anything, in fact, except for higher education and illegal activities. Each lender differs in how fast they can get your money to you if approved, but some lenders even offer same-day funding.
If you have good credit it’s also pretty easy to get approved, but there are still lenders who specialize in personal loans for bad credit. You may need to pay a higher rate or get a co-signer. You also can put up collateral to get a secured loan, such as your car or bank account.
Personal Loan Disadvantages
Personal loans are meant to be taken out infrequently and for large expenses, so if you need financing to make smaller purchases on a more regular basis, a personal loan might not work out for you. Personal loans also don’t offer rewards.
When You Should Use a Credit Card
Credit cards are meant for smaller, more frequent expenses that you can pay off relatively quickly. We even recommend paying off your entire bill before it’s due. Credit card companies only charge you interest if you carry a balance from month to month, so by paying it off entirely, you’re essentially getting a free short-term loan.
When you do it this way you can even put all of your spending on a rewards card, so you get all of the benefits without having to pay interest. The key here is discipline, though; it’s often too easy to start charging more than you can pay off, and the rewards you earn won’t outweigh the interest you’ll owe.
Many credit cards also offer a 0% intro APR period on purchases or balance transfers. If you’re looking to make a big purchase or consolidate other credit card debt to a lower rate, you may want to consider a credit card. Make sure you can pay off the balance before the 0% APR period ends, though.
Credit Card Advantages
If you use your credit card for everyday spending and have the discipline to pay it off each month in full, this type of financing can be a powerful way to earn cash back or travel rewards. Some people pay for all or part of their vacations this way.
But even if you’re not able to do that, credit cards can still be a good backup for when things go wrong. If you haven’t built up your emergency fund, a credit card can help bridge the gap for unexpected expenses. You can get the money you need instantly simply by swiping a card.
Finally, for true cost-cutters looking to save money on new purchases or to pay off existing debt, opening a 0% intro APR card and paying off the charge before the end of the intro period can be a good idea, too. It’s just about the cheapest financing strategy you’ll find.
Credit Card Disadvantages
One of the biggest advantages of credit cards—ease of buying stuff simply by swiping—is also its biggest disadvantage. Because it’s so easy to use a credit card, many people get lulled into debt. After all, the minimum payment is usually pretty reasonable.
But if you look closer, making the minimum payment (especially with the high interest rates that credit cards usually carry) means you could be paying off that same balance for years. And that’s assuming you don’t make additional charges on the card.
Consolidating Debt? Personal Loan vs. Credit Card
If you’re already paying off high-interest credit card debt, you might have to choose between using a personal loan vs. a credit card to consolidate your debt in order to pay a lower rate.
First, we recommend checking whether your credit score is good enough to apply for a personal loan or credit card. Most credit cards require either a good credit score of at least 690 or an excellent credit score of 720 to qualify. If your credit isn’t the greatest, it might be tough to get approved for the right credit card, and a personal loan might be your only option. Some of the best personal loans require a credit score of as low as 580.
Next, we recommend that you use a personal loan calculator to estimate how much it would cost to transfer your debts to one loan.
Finally, calculate how much a 0% APR credit card offer might cost. This is generally the cheaper option, but balance transfer cards often include a balance transfer fee of 3% or 5%, so it’s important to compare whether you really are saving money.
Loan Alternatives
You don’t have to decide between just a credit card vs. personal loan. Here are some other options to consider depending on what you need:
- Home equity loan. This is one way to borrow against the equity you have in your home. You often can qualify for low interest rates this way, but if you don’t keep up with your monthly payments you could lose your house.
- Cash-out refinance. You can refinance your current mortgage with a larger loan and pocket the difference as cash. This can take some time, but can be a good option if you need to borrow money and get a lower mortgage rate at the same time.
- Home equity line of credit (HELOC). This is similar to a home equity loan except you get access to a line of credit you can use during a draw period, followed by a repayment period. You’ll only pay interest on the money you use.
