Wise
When you need to borrow money, two common options are personal loans and credit cards. Each has distinct advantages and disadvantages depending on your situation, the amount you need, and how you plan to repay. Choosing the wrong option can cost you significantly in interest and fees.
This guide compares personal loans and credit cards across key factors to help you make the best decision for your borrowing needs.
Personal loans are typically better for larger, one-time expenses you'll pay off over time with fixed payments. Credit cards work better for smaller purchases you can pay off quickly or for ongoing flexibility. Always compare total cost, not just monthly payment.
Quick Overview Comparison
Here's how personal loans and credit cards compare at a glance:
⚖️ Personal Loan vs. Credit Card:
Personal Loan:
• Lump sum disbursement
• Fixed interest rate (usually)
• Fixed monthly payment
• Set payoff date
• Lower rates for good credit
• May have origination fee
Credit Card:
• Revolving credit line
• Variable interest rate (usually)
• Flexible minimum payment
• No set payoff date
• Potential rewards/perks
• May have annual fee
When Personal Loans Are Better
Personal loans typically make more sense in these situations:
Large, One-Time Expenses: Home repairs, medical bills, major purchases, or emergencies requiring substantial funds are often better funded with personal loans. The fixed payment and term help you budget and ensure the debt gets paid off.
Debt Consolidation: If you have high-interest credit card debt, a personal loan at a lower rate can save money and simplify payments into one monthly amount. This only works if you don't run up new card debt.
You Need Structure: If you struggle with credit card discipline, a personal loan's fixed payments and payoff date provide guardrails. You can't keep borrowing more, and there's a clear end date.
You Want Predictability: Fixed rates and payments make budgeting easy. You know exactly what you'll pay each month and when the debt will be gone.
"A personal loan is like a financial commitment with a clear finish line. A credit card is more like a relationship that can go on indefinitely—for better or worse."
When Credit Cards Are Better
Credit cards make more sense in these situations:
Small Purchases Paid Off Quickly: If you can pay off the balance within the grace period (usually 21-25 days), credit cards are essentially free money. No interest accrues if you pay in full.
Ongoing Flexibility: Credit cards let you borrow as needed up to your limit. If your expenses vary month to month, this flexibility is valuable.
Rewards and Perks: Cash back, travel points, purchase protection, extended warranties—credit cards offer benefits personal loans don't. If you pay in full monthly, these rewards are pure profit.
Building Credit: Responsible credit card use builds credit history effectively. Regular use and on-time payment demonstrate creditworthiness to future lenders.
0% APR Promotions: Balance transfer or new purchase 0% APR offers can be valuable—but only if you pay off the balance before the promotional period ends and the regular high rate kicks in.
Cost Comparison Example
Let's compare borrowing $5,000 with each option:
Personal Loan: $5,000 at 12% APR for 36 months = $166/month, $976 total interest, paid off in 3 years.
Credit Card (minimum payments): $5,000 at 20% APR paying minimum = could take 15+ years and cost $7,000+ in interest. This is why minimum payments are dangerous.
Credit Card (fixed payments): Same $166/month toward a credit card would pay it off faster than minimum payments but likely cost more than the personal loan due to the higher rate.
Factors to Consider
Ask yourself these questions when deciding:
How Much Do You Need? Small amounts favor credit cards (especially if paid quickly). Larger amounts often favor personal loans with lower rates.
How Quickly Can You Repay? If within one billing cycle, credit cards cost nothing. If over years, personal loans usually cost less due to lower rates.
What's Your Credit Score? Good credit gets you better personal loan rates. Bad credit means both options will be expensive, but secured options might help.
How Disciplined Are You? If you'll make minimum payments and keep using the card, you need the structure of a personal loan. If you're disciplined about payoff, cards offer flexibility.
The Bottom Line
Neither personal loans nor credit cards are universally better—the right choice depends on your specific situation. Personal loans offer structure, fixed costs, and typically lower rates for larger amounts. Credit cards offer flexibility, rewards, and cost nothing if paid in full monthly. Consider the total cost, your discipline level, and your specific needs when choosing. Sometimes using both strategically is the best approach.
