Personal loan vs. credit card: Which is better?

When you need to make a purchase but don’t have funds on hand to cover it, you may find yourself weighing the pros and cons of a personal loan vs. a credit card.

Both let you spend money now and repay it later with interest. The key difference is that a personal loan generally has a lower interest rate and a fixed payment schedule, making it better for a large, one-time purchase or consolidating smaller debts. In contrast, a credit card is a revolving line of credit that gives you continual access to funds as long as you keep your account in good standing. So, a credit card is better used for everyday purchases like groceries and gas.

Key insights

• A personal loan gives you a lump sum that has to be paid back by a certain date and generally offers a lower interest rate than a credit card.
• Credit cards are revolving credit, letting you borrow as you need to and repay as you go.
• Personal loans are sometimes useful as a tool to consolidate and pay down credit card debt.

When to get a personal loan

A personal loan is a type of installment loan. You receive a lump sum upfront that you must pay back in installments with interest, and you know the payoff date and the total loan cost from the start.

Getting a personal loan may make sense if you need to make an expensive one-time purchase — for example, fixing the roof on your house, going on a bucket-list vacation or replacing the transmission in your car. However, there are some things you may not be able to use a personal loan for, like college tuition (depending on your lender).

Advantages of personal loans

• Typically lower interest rates than credit cards
• Funds come in one lump sum
• Predictable monthly payments
• Can be used for almost anything
• Less temptation to overspend than with credit cards or other lines of credit
• Secured personal loans can help borrowers with bad credit access funds

Disadvantages of personal loans

• High rates for fair-to-bad credit borrowers
• Not as useful for frequent small purchases, such as groceries or gas
• No rewards or cash back

When to get a credit card

A credit card is a revolving line of credit with a limit. Most credit cards have variable interest rates, but you only pay interest on the money you use and don’t pay back on time. Credit cards are convenient to use for small purchases like groceries and monthly bills. And if you’re able to pay the bill in full each month, you won’t even pay interest on the money you “borrow.”

Advantages of credit cards

• Funds available as needed
• No interest if you pay in full every month
• Access to rewards like cash back and airline miles
• Borrowers with no credit or bad credit can qualify for select cards
• Potential 0% APR promotional periods
• Can also be used for balance transfers

Disadvantages of credit cards

• Higher APRs mean borrowing can be more expensive
• Easy to purchase goods and services you can’t afford
• Credit card processing fees at some establishments

Are personal loans better than credit cards?

Personal loans and credit cards both serve a useful purpose, and which is better for you depends on your situation. If you anticipate a large, one-time expense, you probably want a personal loan. Borrowers with good-to-excellent credit scores should have little trouble securing a personal loan with a lower interest rate than a credit card. In those cases, using a loan for a larger expense could be cost-effective.

Credit cards are generally better for regular, everyday use. If you’re able to pay the bill in full each month, you can avoid interest entirely. You could even end up making money in the form of airline miles, cashback rewards and other perks. Personal loans don’t offer these bonuses.

Should I consolidate my debt?

Borrowers often run into trouble with credit cards when they pay only the monthly minimum but keep making purchases. This debt can quickly snowball and become unmanageable. According to the Federal Reserve, American families owed an average of $6,300 in credit card debt in 2019.

This is where taking out a personal loan for debt consolidation can sometimes be a useful tool for paying down debt. It’s worth mentioning that you can also consolidate debt with a balance transfer credit card, but it may be more difficult.

“The advantage of consolidating the debt from a credit card to a personal loan is to take a high-variable rate with high payments and convert it to lower fixed rate debt with a lower installment per month,” explained Andrew Gold, a financial advisor at Prestige Wealth Management.

According to the Federal Reserve, American families owed an average of $6,300 in credit card debt in 2019.”

A reviewer from Texas felt like they were drowning in credit card debt and turned to a personal loan for help consolidating that debt: “They looked up all the credit cards that I was backed up on — not only mine, but my spouse as well — and we combined them all. They gave me one payment a month and it was something I could afford at the time. The program worked well. My total debt was $70,000 and I'm down to $6,000.”

Things to consider before consolidating credit card debt

In this reviewer’s case, debt consolidation worked as intended, but Gold warned that those who go down this road have to be prepared to change the habits that got them into trouble in the first place. “You have to really be honest with yourself about how you got into the situation,” he said.

Where a consolidation loan isn't helpful (and can even be harmful) is when borrowers still don’t stop making credit card purchases they can’t afford. “It will just be a Band-Aid and temporary fix,” said Gold, adding that you can end up with even larger debt.

Before you consider consolidating, be sure you can afford the monthly loan payment and that you can stop using credit cards until the personal loan is completely repaid. If you can’t, you may wind up with more debt than you had when you started.

Bottom line

Personal loans and credit cards are two ways to borrow money for upcoming purchases or existing bills. Personal loans are a lower-interest way to finance larger, one-time expenses, such as car repairs or home improvement projects. Credit cards generally come with higher interest rates but also some perks; when you stick to your budget, you can reap rewards without paying any interest.

When consumers get into trouble with runaway credit card debt, a personal loan is often a simpler way to consolidate several smaller debts into a single account with a lower interest rate and one monthly payment.