Personal Loan vs. Credit Card: Which Is Better?

Choosing between a personal loan or a credit card

While every situation is unique, most borrowers deciding between a personal loan or a credit card base their decision on three factors:

• How much you actually need. Personal loans have set minimum and maximum amounts, whereas credit cards set a monthly credit limit.
• How long you plan to pay for the amount you borrow. You’ll make a credit card payment monthly. Personal loans also have monthly payments, but the total loan term can last anywhere from one to 10 years, depending on the lender.
• Whether you need funds to pay for a one-time expense or ongoing purchases. Credit cards are best for paying frequent, ongoing expenses like groceries or utility bills. Personal loans are ideal for larger, one-time expenses.

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. 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). A personal loan can also be helpful if you need help paying for unexpected or emergency expenses. While a credit card offers more immediate access to funds, a personal loan can cover a larger emergency expense that will take longer to repay.

Lenders offering personal loans usually set minimum and maximum loan amounts. For example, some lenders require a minimum personal loan of $5,000 and set a maximum loan amount of $100,000. For this reason, personal loans are best if you need to borrow a large amount for a one-time expense.

Getting approved for a personal loan

Lenders are more likely to approve a personal loan application if you have a good credit score. While every lender will set its own approval requirements, you'll generally have more success getting approved if your credit score is above 670.

If you have bad credit, lenders may not approve your application, or they may offer higher interest rates, smaller loan amounts or charge higher fees. Lenders do this because they tend to view borrowers with lower credit scores as higher risk. If you have a fair credit score (580 to 669) or a poor credit score (300 to 579), you may struggle to get approved for a personal loan.

If you have a lower credit score, a secured personal loan may be a better option. With a secured loan, you put up collateral (like a car, home or savings account) and if you default on the loan, the lender can repossess the collateral. Lenders are more likely to approve secured personal loans because the collateral lowers the risk on their end.

Ideal use cases for a personal loan

A personal loan is ideal when you:

• Need to fund a large, one-time purchase or emergency expense

• Want to consolidate high-interest credit card debt into a single fixed-rate payment

• Plan to remodel your home or pay for a wedding

• Need to finance a major move or relocation

• Prefer predictable monthly payments with a clear payoff date

Pros and cons of personal loans

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. A credit card can also be a good payment option if you need immediate funding and are confident you’ll be able to cover the cost later. And if you’re able to pay the bill in full each month, you won’t pay interest on the money you borrow.

Getting approved for a credit card

Similar to personal loans, lenders set approval requirements for credit cards. Your credit score is an important factor in whether a lender will approve your application or not.

Higher-tier credit cards often require better credit scores. In many cases, premium travel and rewards cards require credit scores of 720 or higher. More basic rewards cards often have a credit score requirement of 670 or higher. Still, some lenders offer credit cards specifically targeted to students and borrowers with fair credit scores (580 and above).

If you have poor credit, you could get approved for a secured credit card, which doesn't set a minimum credit score but requires a cash deposit. Like secured personal loans, this cash deposit acts as collateral, so lenders are more likely to approve applicants with bad credit or no credit history.

Ideal use cases for a credit card

A credit card is ideal when you:

• Want to earn rewards or cash back on everyday spending

• Can reliably pay off your balance each month to avoid interest

• Need a financial safety net for emergencies

• Pay for recurring expenses like streaming services, rent or utilities

• Want to build or improve your credit score over time

Pros and cons of credit cards

Comparing interest rates and fees

Interest rates and fees can vary significantly between personal loans and credit cards, so it's important to understand how each works.

Personal loans typically offer lower interest rates than credit cards, especially for borrowers with good or excellent credit. Rates for personal loans can range from about 6% to 36%, depending on the lender and your credit profile. Most personal loans come with fixed rates, meaning your monthly payments stay the same throughout the life of the loan.

Credit cards generally have higher interest rates, with average APRs often exceeding 20%. However, some credit cards offer introductory 0% APR promotions for new cardholders, which can be helpful for short-term borrowing if you can pay off the balance before the promotional period ends.

In addition to interest, you should consider fees. Personal loans may have origination fees ranging from 1% to 10% of the loan amount. Credit cards may charge annual fees, balance transfer fees and late payment fees. Choosing the right option means factoring in both the interest rate and the full cost of borrowing over time.

Personal loans vs. credit cards: Which is better?

Personal loans and credit cards both serve a useful purpose, and which is better for you depends on your situation. Before deciding between the two, consider how much you need to borrow, your preferred repayment structure and whether you’ll need ongoing access to funds.

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. Personal loans provide predictable fixed monthly payments and a clear payoff date, so they’re often easier to budget around.

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. Credit cards require a lower monthly minimum payment, but prolonging the payoff can lead to paying more in interest over time. On the plus side, you could end up making money in the form of airline miles, cash back rewards and other perks if you qualify for a rewards card.

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, especially if the card comes with a higher APR.

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, vice president of Prestige Wealth Management.

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.”

» MORE: Personal loan vs. debt consolidation

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.

If you decide to consolidate debt using a personal loan, it may seem like an obvious next step to close paid-off cards. However, closing older accounts can shorten your credit history and the average age of accounts in your credit portfolio. Keeping older accounts open may be the right move, as long as you’re mindful of your spending moving forward.

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.

FAQ

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.