Credit, Loans

Personal loans vs credit cards

By Nooreen B

Reviewed by Matt Mayerle

Edited by Izzy M

Modified on August 1, 2024

Personal loans and credit cards are two financing options available to borrowers who need quick cash. A personal loan is an installment loan that borrowers use for small to large unexpected expenses. In contrast, a credit card is a revolving line of credit that’s great for everyday purchases or unexpected expenses.

But between a personal loan vs credit card, which is the best financial product for you? The answer depends on your financial situation and repayment preferences. Keep reading for an in-depth explanation of each financial product to help you make an informed decision.

What is the Difference Between a Personal Loan vs. a Credit Card?

Personal loans and credit cards are two useful financial products that can be used for small to large expenses. However, these loan options differ when it comes to repayment, fees, and rates. Below, you’ll find a detailed comparison between personal loans and credit cards so you can better understand the differences.

	Personal Loan	Credit Card
Loan amount vs. revolving credit	Fixed Lump Sum	Revolving Credit
Interest rates	Generally lower and fixed interest rates	Higher and variable interest rates
Secured or unsecured	Unsecured (typically), can be secured	Unsecured (typically), can be secured
Benefits	No rewards, but fixed monthly payments with a repayment schedule	Rewards such as cash back, points, or miles
Closing dates	Set term with a clear end date	No set term, ongoing as long as the account is open

Interest Rates and Repayments

Personal loan rates are generally lower than credit cards, which are known to have high rates. According to CNN, the average annual percentage rate (APR) for credit cards is 22.63% as of February 2024.¹

A personal loan generally has a fixed rate, although there are variable rate options. A fixed-rate does not change throughout the loan repayment process. In contrast, a credit card interest rate is variable and changes depending on the type of transaction you make.

These are the main types of credit card APRs:

Introductory APR – A limited-time, reduced APR that typically lasts a few months.
Purchase APR – The standard APR charged for purchases that are not paid off before the end of the billing cycle.
Balance Transfer APR – An interest rate charged for transferring existing debt, such as personal loan debt, onto the credit card in order to consolidate.
Cash Advance APR – This is typically the highest APR for revolving credit transactions. This interest rate is charged daily for withdrawing cash, starting on the day of the initial withdrawal.
Penalty APR – Missing or returned payments may incur a penalty APR, which is typically 29.99%.¹ This rate can last for several months or indefinitely.

The repayment terms differ greatly between personal loans and credit cards. Personal loans require monthly payments for a predetermined period, but credit card borrowers must pay at least the minimum every month. A minimum payment is typically a small percentage of the outstanding balance or a fixed dollar amount. Revolving cards do not have a fixed repayment plan, which means the borrower can choose to only pay the minimum payment.

Credit Limits vs. Borrowing Amounts

A personal loan grants the borrower a lump sum upfront, which is usually deposited into a bank account. In contrast, a credit card does not provide a lump sum, but rather a credit limit. A credit limit is the maximum amount of debt a borrower can accumulate on their revolving credit card.

Fees and Charges

These are common personal loan fees that lenders charge:

Origination Fee – An origination fee is a one-time fee that covers the cost of processing your loan application. This fee can be a percentage of the loan amount or a flat fee.
Late Payment Fee – A late loan payment will usually result in a late payment fee. Multiple late payments over the loan term could result in a higher fee amount.
Loan Application Fee – Some lenders charge an upfront fee for application processing. This type of fee does not guarantee approval.
Prepayment Fee – Changing the loan term can result in a prepayment penalty fee with certain lenders. Check if your lender charges this fee before making early payments.

Credit cards have more fees than personal loans. However, you can avoid specific fees by avoiding certain types of transactions.

These are common fees found in credit card terms:

Annual Fee – This is an annual charge for using the credit card. Some credit card companies do not require annual fees in their credit card terms.
Cash Advance Fee – Withdrawing cash using your credit card will result in a fee that’s usually 3% or 5% of the total withdrawal amount.²
Balance Transfer Fee – A charge for transferring debt onto the credit account. You can avoid this fee by consolidating debt with another financial product.
Foreign Transaction Fee – A fee for transactions made out of the country. Some travel cards do not charge this type of fee for your convenience.
Credit Card Processing Fee – Businesses charge this fee to complete transactions. It’s typically a small percentage of the transaction amount.

When Are Loans a Good Option to Use?

Personal loans are generally the preferable borrowing strategy when someone needs money for unexpected large purchases. For example, unexpected loan scenarios include broken air conditioner units or damaged cars. Personal loan borrowers can conveniently pay off costly expenses through monthly payments that fit into their monthly budgeting plan.

A personal loan is also good for financial planning. Borrowers can organize their finances and improve their budgeting strategy by consolidating debt. Debt consolidation is when you combine multiple debts in one account in order to get one monthly payment and potentially better rates and terms.

Benefits of Loans

There are a lot of benefits you can get with a personal loan. If you’re thinking of using a loan for consolidation or an unexpected expense, these are some of the perks you could get:

Lower Interest Rates – Personal loans generally have lower interest rates than other quick cash loans. A high credit score can help you get the best rate. However, your interest rate may still be competitive with a bad or fair credit score.
Easier Financial Planning – Personal loans have a set repayment schedule, so you can rely on predictable payment terms to pay off your loan on time.
Quick Loan Processing – Online personal loans can be processed very quickly. Most eligible borrowers could get emergency funding the same day they are approved.
Fixed Interest Rate – A personal loan generally always has a fixed interest rate. Fixed interest rates do not change, which makes financial planning easier with predictable monthly payments
Wide Range of Uses – Loans can be used for all types of expenses. Many people use this type of installment loan for debt consolidation to get better rates and terms that save them money.

Drawbacks of Loans

While loans are a convenient financing option, there are disadvantages you should know about.

High Rates for Bad Credit – Unfortunately, a bad credit score can result in high or variable rates.
Fees and Penalties – Loans have fees and penalties you should know about, such as origination fees, late fees, and prepayment penalty fees.
Impact on Credit Score – Applying for a loan can negatively impact your credit score. Every hard credit check can deduct as much as ten points from your score.
Risk of Overborrowing – Personal loans can provide large loan amounts. Many people end up borrowing more than they need, which can result in financial hardship.
Lack of Flexibility – Unlike credit cards, you cannot make a smaller monthly payment on a personal loan if your financial situation changes.
Secured Loan Requirements – Some lenders offer secured personal loans, which require collateral. However, using collateral to secure funding is risky as you could lose your assets.

When Are Credit Cards a Good Option to Use?

There are certain instances where a credit card is the preferable option over personal loans. A credit card can work as an emergency fund. However, you should only use credit when you can pay the balance in full by the end of your credit card billing cycle. Otherwise, you will have to pay interest.

A good credit card strategy is to use a rewards card for everyday spending. Rewards cards can help borrowers earn points, cash back, or travel miles from everyday purchases or from specific spending categories. But remember that using a credit card responsibly is vital.

Keeping debt low can improve credit scores over time. Your credit card usage makes up 30% of your total FICO Score. Keeping your credit card usage low and paying on time can help you start credit building.

Benefits of Credit Cards

Credit cards can offer various benefits to borrowers, such as the following:

Flexible Spending – Unlike personal loans, borrowers can continuously borrow up to their credit limit. But remember that using too much credit can raise your credit utilization. A high credit utilization percentage can negatively impact your credit score.
Debt Consolidation – You can use a credit card to make a balance transfer if you want fewer monthly bills. A balance transfer is when you transfer debt onto a credit card as a form of debt consolidation. Consolidating may help you save money and avoid late fees.
Rewards – Some lenders offer reward programs for borrowers that allow them to earn rewards points, cash back, or travel miles. Rewards points can typically be traded for gift cards, statement credits, travel miles, or transfers to hotel partners.
Flexible Payments – Credit cards do not offer a repayment plan, which means borrowers get payment flexibility. The smallest monthly payment you can make is the minimum, which is a percentage of your outstanding balance or a flat fee. You can pay the minimum to reduce your monthly bills or pay any amount higher than that.

Drawbacks of Credit Cards

While credit cards offer convenience, there are drawbacks that can directly affect your finances.

High Rates – Credit cards generally have higher rates than loans. If you have good credit, you may get the best rate offers. However, borrowers with bad credit may only qualify for high rates.
Fees – Credit cards tend to have more fees than personal loans. Generally, all creditors charge late fees, which are penalty charges for late or missed payments. If you’re looking for a credit card, ask about annual fees. Some lenders charge a yearly fee just for having the card, which can go up to a few hundred dollars.
Debt Accumulation – Poor financial management can result in too much credit card debt. Credit card debt is typically hard to pay off due to high rates and fees. It’s critical to keep an eye on your credit card spending and establish a financial management plan early.
Impact on Credit Score – Your credit card usage directly affects your creditworthiness. Carrying too much debt and paying bills late can decrease your credit.
Risk of Fraud – Credit card information is often stolen from skimming practices or unsecured websites. Borrowers are at risk of fraud and identity theft if they are not monitoring their monthly statements.
Financial Dependency – Many borrowers with poor financial management end up too reliant on credit. Using credit to afford monthly bills and other expenses can result in an unmanageable amount of debt.

Impact on Credit Score

Credit scores are affected by both personal loans and credit cards. A credit inquiry will decrease your credit by a few points and appear on your credit history. And after you get approved for a loan or credit line, your payment history will boost or hurt your credit.

Maintaining a positive payment history can increase your creditworthiness over time, while late payments will decrease your credit. Carrying too much debt can also negatively impact credit scores. Your credit utilization ratio is a percentage that expresses how much debt you have compared to your overall credit limits. A high credit utilization ratio can

Should I Use a Personal Loan to Pay Off a Credit Card?

Many people use personal loans as credit card consolidation loans. If you are struggling to repay credit cards with high interest rates, you may want to consider consolidating with a personal loan.

Personal loans typically have lower rates and fewer fees than credit cards. Personal loans also have a strict repayment schedule, while credit cards do not. By consolidating credit card debt with a personal loan, you get a manageable repayment schedule and potentially better rates.

Look to CreditNinja for Your Personal Loan Solution

Between a personal loan vs credit card, the best option for you depends on your financial need and your repayment preferences. Both personal loans and credit cards offer financial relief, but they are ideal for different purposes. Personal loans are ideal for large purchases and debt consolidation, while credit cards are better for everyday spending.

CreditNinja provides online personal loans with competitive rates, personalized loan terms, and flexible repayment terms. We understand that time is essential, which is why we offer same-day approval decisions!* Our application process is also quick and easy. If you need emergency assistance with good or bad credit, apply with us to see if you qualify!

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