Credit Cards

Personal Loans vs. Credit Cards: How to Borrow Smarter

The differences between personal loans and credit cards can make one a better choice than the other. Learn how to choose between personal loans vs. credit cards.
A son discusses the difference between credit cards and personal loans with his parents.
By Gina Freeman
Updated on: February 4th, 2022

It’s natural to think of credit cards first when we consider borrowing because they are everywhere. We’re asked to sign up for cards with every purchase at the mall, and we toss ads for credit cards every time we retrieve our mail.

But what about personal loans vs. credit cards? Should credit cards always be the go-to when we need fast cash? Sometimes, the answer is yes — but not always.

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Personal Loans vs. Credit Cards: What’s the Difference?

Credit cards and personal loans are similar in that they are usually (but not always) unsecured, which means the lender cannot take an asset like our home or car from us if we don’t repay the debt. Applying for either takes little time, and both allow us to use the funds we borrow for almost any purpose. But there are significant differences.

  • The most crucial difference is that personal loans are installment loans, while credit cards are revolving debt.

  • Personal loans tend to have lower interest rates than credit cards.

  • Credit cards can have helpful features like rewards, introductory interest rates, and cashback.

  • Personal loans usually have fixed interest rates, while credit cards usually have variable interest rates.

  • Personal loans are simple, usually with a fixed rate and payment. Credit cards can have multiple rates depending on the type and timing of purchases and cash advances.

  • Credit cards can have ongoing fees like annual memberships, while personal loan fees (except for late charges) are one-time upfront charges.

You can’t decide between personal loans and credit cards without understanding installment vs. revolving debt. Here’s what you need to know.

What is installment debt (like a personal loan)?

Installment debt means borrowing a lump sum and making payments (installments) over time until the balance is zero. When you borrow with a personal loan, the lender delivers the money to you, and then you make a monthly payment until you clear your balance.

The loan amount, interest rate, and loan term determine your installment loan payment. Most personal loans have fixed interest rates, which means that your payment is the same every month. As long as you make your payments as agreed, you’ll be out of debt when your term is up.

What is revolving debt (like a credit card)?

Revolving debt means your lender approves a specific loan amount called a credit limit. You can borrow up to your credit limit, repay some or all of your balance, and borrow again, as long as you abide by the terms of your credit agreement.

Your monthly payment will usually vary because it depends on your current account balance and your interest rate (which may change over time). Most credit cards allow you to choose your payment — a minimum payment, the entire balance, or some amount in between. If you pay your balance every month, you don’t incur interest charges at all.

Pros and Cons of Personal Loans vs. Credit Cards

Personal loans and credit cards have pros and cons that make them a better choice for different purposes.

Credit Cards

Pros Cons
Easy to use Interest rates tend to be higher
Enjoy rewards, cashback, interest-free introductory periods, or other perks Can harm credit scores if balances are too high
Low to no setup cost Fees and interest rates can be complicated
Minimum payment can be helpful if you are short of cash Carrying a balance can be costly
No interest charged if you pay the balance in full each month
Protections if lost or stolen

Personal Loans

 

Pros Cons
Interest rates are lower Less convenient and flexible for purchases
Can improve credit scores May be too expensive for smaller loan amounts
Interest rates and payments are usually fixed
Available in higher loan amounts
Simple to understand

When Is a Credit Card Better?

There is a reason that most of us carry at least one credit card, and many of us have several of them. Credit cards are ideal when we want to spend safely without carrying a lot of cash around. They can get us out of a jam when we need money for an emergency and don’t have it. And if we are clever, we can earn benefits like cashback and rewards even if we always pay our balances and never owe interest.

Credit cards are your best bet for smaller amounts, for spending when you don’t know in advance how much you’ll need, and for emergencies or convenience. Credit cards are ideal for when you don’t need to borrow money over an extended period of time.

When Is a Personal Loan Better?

Personal loans are ideal for larger expenditures because interest rates are lower, and payments are usually fixed. If you can’t pay off a purchase right away or in a few months, you should strongly consider a personal loan.

You can budget more easily when you know what your monthly cost will be. It’s also much harder to overspend with a personal loan because you borrow once and can’t keep coming back for more. While less flexible and convenient than credit cards, personal loans can also be obtained quickly with low setup costs.

The most popular uses for personal loans include consolidating credit card debt, refinancing higher-interest loans, making expensive purchases like travel or covering wedding costs, funding small businesses, and paying for home improvements.

Bottom Line

When it comes to personal loans vs. credit cards, most people will find that neither personal loans nor credit cards are the best option for all of their borrowing needs. You might carry a couple of credit cards for your everyday buying. They are convenient and safe when used correctly. Personal loans, on the other hand, are optimal for bigger purchases that you pay off over time.

About the Author

Gina Freeman is a personal finance specialist with AmOne. Her career has covered business credit, bankruptcy, tax accounting, and mortgage financing, and she has been a finance writer or editor for over 15 years. Gina is extremely consumer-focused and enjoys breaking down complex topics to help readers make confident financial decisions.