Unearth Your Fortune

By Maddy Scheckel

March 9, 2023

Some of the links in this post are from our sponsors, and we might earn a commission if you click on one.

I’ve been getting tons of offers for personal loans and credit cards in my inbox.

If you’re in the same boat, you might be wondering which is the better option, between a personal loan vs credit card.

Fortunately, I have quite a lot of experience with both credit cards and personal loans. 

I use credit cards to pay for everyday purchases, and in the past, I’ve relied on personal loans to help me pay off debt. 

So if you’re planning on contributing to the $312.5 billion increase in spending by Americans this year, continue reading. 

Below, I’ll compare personal loans vs credit cards to help you make your own confident financial decisions. 

Biggest Differences Between a Personal Loan Vs. Credit Card

Choosing between a personal loan vs credit card can be complicated. Make sure to weigh all the risks and rewards prior to signing any contracts.

Personal loan vs credit card. Which option is more beneficial for your financial health? 

They both offer unique pros and cons, and there are a few differences to watch out for.

1 – Amounts

A major difference between a personal loan vs credit card is the amount of money you can borrow.

Typically, personal loans are for big, once-off purchases like a car, home renovation, or debt consolidation. 

Credit cards, however, are mainly used for smaller, everyday purchases like groceries, clothes, and dining out. 

And this makes sense.

Considering that the average interest rate on a credit card is around 20%, you won’t want to use it for large purchases.

Pro tip: If you’re struggling to get approved for the amount of money you need, consider a secured personal loan. This is a loan for which you put up something (like a house or savings account) as collateral. Your collateral lowers the lenders’ risk by giving them a way to recoup their losses if you fail to pay back the loan. 

2 – Repayment

Personal loans come with a strict repayment plan. 

This amount and timeline will be outlined in your loan agreement.

Since you know how much money you need to pay every month for the entire repayment period, it’s easy to budget without any surprises.

Credit cards offer more flexibility. 

When you buy something with your credit card, you’ll have to at least pay a minimum monthly installment. This is a small percentage of your credit card balance.

The remaining balance is carried over to the next month, where it accumulates interest. By making the minimum monthly payment, you can purchase items and pay for them over several months.

You can, of course, pay more than the minimum installment and reduce the amount of money that accumulates interest.

For instance, if you pay your balance in full every month, you’ll pay zero interest. This helps you build your credit score at the same time!

3 – Fees

Many people find that maintaining a credit card is generally cheaper than a personal loan. 

This is because there are plenty of credit cards available with no annual fees.

Credit cards also charge fees for things like balance transfers and currency exchanges, but most people don’t do those often. So, you’ll usually only pay a fee if you miss an installment. 

On the flip side, most personal loans require origination fees, application fees, prepayment penalties, and payment protection insurance. 

You want to factor in these fees when taking out a personal loan since they can quickly eat into your budget.

4 – Interest Rates

Both personal loans and credit cards come with interest rates. 

However, the convenience of swiping your credit card often comes at a higher interest rate than personal loans.

The average credit card interest rate is around 20%, while personal loans are only 11.23%

This lower interest rate is a big reason personal loans are popular amongst consumers trying to consolidate credit card debt. It lets consumers pay off high-interest credit card debt and save money. 

Pro tip: Some credit cards run introductory offers with a 0% interest rate for the first few months after opening the card. This could be a good option for you if you don’t want to open a loan and plan on paying off the full balance. 

5 – What They Are Best Used For

Deciding between a personal loan vs credit card may depend on what you plan to use the money for. 

Personal loans and credit cards have different uses.

Personal loans are better if you’re making big, one-time purchases and don’t want to pay a lot in interest. 

Personal loans are also handy if you’re stuck in thousands of dollars worth of credit card debt and want to streamline payments. You can consolidate credit card debt with a personal loan and save money on interest.

But if you’re looking for a way to pay for everyday purchases while building good credit, credit cards are a better choice. 

The convenience allows you to shop almost anywhere (in person and online), and if you settle your balance every month, you can avoid paying interest.

Pros and Cons of Credit Cards

Pros Cons 
Most retailers accept credit cardsHigh-interest rates
Little to no feesCreates a cycle of debt if used irresponsibly
Many have benefits such as cashback, travel points, fraud protection, and return protectionLate payments can damage your credit

Pros and Cons of Personal Loans

Pros Cons 
Predictable and fixed repayment plansComes with a host of fees, such as origination fees and prepayment penalties
Typically lower interest ratesNo rewards or cashback
Terrific option for large purchases such as a car or home improvement projectSecured loans require collateral 

Is it Better to Have a Credit Card or a Loan?

Still working on making your decision between a personal loan vs credit card?

If you’re looking to borrow large sums of money, personal loans might be a better choice. 

Personal loan interest rates are typically lower, and the predictable repayment plans make budgeting easy.

Personal loans are also helpful if you struggle to pay off high-interest credit card debt. 

For instance, if you have $5,000 in credit card debt at 25% interest, you can take out a personal loan for $5,000 at a 10% fixed APR. Use this $5,000 to settle your credit cards and pay your personal loan at a lower interest rate.

On the other hand, credit cards are awesome for their convenience. 

You can use a credit card to buy everyday items and build your credit score simultaneously. If you settle your balance every month, you won’t pay a cent in interest!

I’m also a big fan of the cashback, travel rewards, and other perks you can get with a credit card.

Commonly Asked Questions About Personal Loan Vs. Credit Card

Is it Worse to Have a Loan or Credit Card?

Being stuck in credit card debt is worse than having to repay a personal loan because the interest rates are typically much higher. Credit cards also allow you to spend money while you’re in debt, and this cycle can make it harder to get out of debt.

What is a Disadvantage of a Personal Loan Over a Credit Card?

Personal loans are meant for big-ticket items such as a car, debt consolidation, or a home improvement project. So it’s impractical if you need a convenient payment method to pay for everyday expenses like groceries, utilities, and restaurant bills.

What is the Point of Having a Charge Card?

Charge cards are similar to credit cards. You can use them to buy goods and services without using cash. The main difference is that charge cards don’t usually have a pre-set spending limit, and you must settle the entire balance every month.

Do Personal Loans Affect Your Credit Score Like Credit Cards?

Personal loans have a similar impact on your credit score as a credit card. When applying, your credit score will take a slight hit since your lender will conduct a hard credit inquiry, but this is temporary. You can build good credit with both as you make on-time payments. 

Loan or Credit Card Which is Better?

Personal loans may be a better choice if you’re looking to buy expensive, one-off items at low-interest rates. But if you want to pay for small, everyday purchases while building your credit, opt for a credit card. The cashback and credit card benefits can also help stretch your budget further.

Credit Card Vs Personal Loan Interest?

Personal loans usually have lower interest rates than credit cards. The average credit card interest rate is close to 20%, while personal loan interest rates are around 11.23%.

Personal Loan Vs Credit Card For Debt Consolidation?

Personal loans are better when consolidating debt because they often come with lower interest rates. Many lenders are also offering loans tailored around debt consolidation, helping you access the lowest rates possible. These lenders will also pay your creditors directly, so all you have to do is pay your loan on time.

Best Charge Card?

American Express has one of the best charge cards. It provides 24/7 dedicated Platinum Concierge services and zero spending limits. As you swipe this card, you also get travel benefits, membership rewards, and cashback.

Can I Pay a Personal Loan With a Credit Card?

Whether or not you can pay a personal loan off with a credit card will depend on your lender. This will be in the fine print in your loan or credit card agreement. Also, be aware that some credit card companies do charge high fees for balance transfers of this sort. 

Should You Use a Personal Loan to Pay Off Credit Card Debt?

Paying off credit card debt with a personal loan is a good idea if you qualify for a personal loan with lower interest rates. This strategy is also known as debt consolidation and allows you to save money on interest and pay off your credit card faster.

Leave a Reply

Your email address will not be published. Required fields are marked *