At a Glance

Both personal loans and credit cards can be used to make or fund purchases. Both require that you fill out an application, go through an approval process, and either get approved or denied. Factors taken into consideration include your credit score, credit history, income, and others. Both also typically have specific interest rates, monthly payments, fees, amount limits, and more.

And, using one or the other without having a budget and financial plan in place can lead to accumulation of debt, interest, fees, and other problems.

In this article, learn more about:

Overview of personal loan vs. credit cards

While there are a few similarities, there are also a few key differences between a personal loan and a credit card, primarily in that they are distinct types of credit:

Personal Loans:

  • Function as installment loans, which means you receive the funds in a lump sum up front and repay the loan in payments each month over a certain period.
  • Can be secured or unsecured.
  • Have an end date, or term, when the loan will be paid off, which makes them easier to budget.
  • Can have lower interest rates for borrowers with excellent credit.
  • Funds can be used for about anything.

Related: Everything You Need to Know About Personal Loans

Credit cards:

  • Are revolving credit, so you borrow as much as you need (up to your limit) and your payments depend on the outstanding balance.
  • Can be secured or unsecured.
  • Do not have interest if the balance is paid in full each month.
  • Have higher interest rates in general.
  • There is no end date, and if a balance is carried from month-to-month, it can be difficult to get out of debt.
  • Can be used to purchase or pay for about anything.
  • Are more convenient for everyday use.

When to use personal loans

A personal loan may be best for large, one-time expenses such as home renovations, car repairs, paying for a vacation or wedding, medical bills, or an emergency. Or they can also be used when consolidating debt into one, single loan with a lower interest rate.

Typically, personal loan amounts can range from $1,000 to $100,000, so if you need to borrow a lot for a longer period, a personal loan may be the best option. Plus, you are able to request how much you borrow.

It’s best to consider getting a personal loan when you have great to excellent credit, because this increases your chances of getting a better loan term and lower APR.

Related: Reasons to get a personal loan

When to use credit cards

On the other hand, credit cards are meant for smaller or more frequent, everyday purchases that can be paid off quickly. They are also great for small emergencies. Experts recommend only spending as much as you can afford to pay off each month to avoid carrying a balance and accumulating interest.

There are different types of credit cards, some offering rewards or cash back for spending, so using these cards to make regular purchases can benefit you in additional ways in the long run.

Balance transfer credit cards can also be used to consolidate credit card debt. These cards typically have a 0% introductory APR period, which means you can consolidate and start paying off credit card debt without accumulating interest. This can help save you money.

Pros and cons of personal loans

Pros Cons
  • Lower, fixed interest rates keep each monthly payment the same, which makes it easier to budget.
  • There is a definitive date when the loan will be paid off.
  • Funds can be used for about anything, including consolidating debt.
  • Approval and fund transfer can happen quickly, even within one business day.
  • Many lenders offer prequalification online, so borrowers can see estimates of loan terms and rates before applying.
  • Not ideal for small or regular purchases.
  • If you have poor credit, the interest rates may be high, causing you to pay more over the life of the loan.
  • Do not offer ongoing access to funds.
  • Often have fees, such as origination fees, service fees, and others.
  • May have to use property, such as a car or home, as collateral to qualify. You can lose that asset if you don’t repay the loan.

Pros and cons of credit cards

Pros Cons
  • Can be used for everyday spending.
  • Do not accumulate interest if the full balance is paid off each month.
  • Can earn rewards such as cash back, points or miles.
  • Convenient.
  • 0% intro APR cards can help you save money on interest when consolidating credit card debt.
  • Ongoing access to funds (up to your credit limit).
  • It can be a terrific way to build better credit over time.
  • Easy to use, therefore easy to accumulate debt.
  • Unpaid monthly balances accrue interest.
  • High interest rates that can vary each month.
  • Can have monthly or annual fees.
  • Monthly payment varies each month.

Alternatives to personal loans and credit cards

If you need funds, personal loans and credit cards are not your only option. In fact, depending on what you need the funds for and your credit score, there could be multiple options available:

1. Debt consolidation loan: Like a personal loan, these loans are specifically designed for consolidating debt. Ideally, the loan has a lower interest rate which can help you pay off the debt faster and save you money.

Compare: Best Debt Consolidation Loans in September 2022

2. Personal line of credit: Works similarly to both a credit card and personal loan. Once approved, you have a credit limit you can withdraw from, like a credit card, up to the limit. You would pay interest on what you borrow.

Learn more: How a personal line of credit works

3. Peer-to-peer loan: Some online lending platforms match you with an investor who can fund your needs, and you would get the cash. You would be charged interest and may have to pay a loan origination fee, but the interest can be low if you have excellent credit.

Related: How Does Peer-to-Peer Lending Work

4. Home equity loan or HELOC: If you own your home, HEL and HELOCs are lending options that allow you to borrow against your home’s equity. These often have longer repayment periods and lower interest rates, but you can lose your home if you do not make the payments.

Learn more: Home Equity Loans vs. HELOC

5. Credit union loans: If you belong to a credit union, you may qualify for these loans. Factors other than your credit score can help you qualify.

Related: How credit union personal loans work

6. Cash-out refinance: This is also an option if you own your home as it replaces your existing mortgage with a new one that is larger than your current balance. Then, you can withdraw the difference and use those funds for almost anything. The downside is you can lose your home if you don’t repay the loan.

Related: How Does a Cash-Out Refinance Work?

Other options can include debt settlement, a 401(k) loan, payday loan, or family and friends.

Personal loans for bad credit

Even if you have poor credit, you may still be able to qualify for a personal loan. Most often you’ll find success with online lenders, who tend to be more flexible with requirements (compared to traditional banks or credit unions), or with peer-to-peer lenders.

However, note that even if you are approved for a loan, you will likely have much higher interest rates and be subject to fees such as origination fees, early pay-off fees, and others. It is important to do your research to compare lenders to find the best one for you. You should also try to improve your score before applying for a loan to increase your chances of the application being accepted and qualifying for lower APR.

Related: Pre-qualified personal loans

Some examples of lenders who work with borrowers with fair or poor credit include:

  • Avant (minimum 580)
  • BestEgg (minimum 640)
  • LendingClub (minimum 600)
  • OppLoans (no minimum)
  • Peerform (minimum 600)
  • Upstart (minimum 300)

Credit cards for bad credit

Like personal loans, you may still be able to qualify for a credit card even if you have poor credit. Most of the time, these would be secured cards. With a secured card, a borrower provides capital toward the card’s balance limit. These terms can vary, so be sure to read the cardholder agreement carefully to understand the terms for your card.

Related: Instant approval credit cards for bad credit

FAQs

What is the difference between a personal loan and a credit card?

There are a few differences between personal loans and credit cards, including the type of credit, how you receive the funds (lump sum vs. as you need it), funding limits, interest rates, and repayment terms. They can also be used differently depending on what you need to buy or fund.

Is it better to get a personal loan or credit card to build credit?

Both personal loans and credit cards can be used to build credit. The best one for you depends on your personal situation and financial needs. If you do not need a considerable sum for a large purchase to pay back over time, using a credit card may be better. However, it is critical to pay off the balance in full each month to avoid negative consequences on your score.

Do personal loans have lower interest rates than credit cards?

Typically, personal loans have lower interest rates than credit cards. Average personal loan interest rates can range from 3% to 36% depending on your credit score, but as of January 2022, the average rate was 10.28%. On the other hand, the average interest rate for a credit card is between 14.51% and 18.26%.

Related: Credit Cards with Low Interest Rates