Personal loan vs. credit card: How to decide which is right for you

When deciding between a personal loan or a credit card, it’s important to weigh their key differences, how you plan to use the funds, and your personal financial situation. A credit card may make sense for smaller purchases, like groceries, gas, or your morning coffee. As long as you’re confident you can pay off the total balance at the end of the month, using a credit card can be a good option.

However, if you’re looking to finance a larger purchase, like a home remodeling project, a personal loan can help you access the funds you need with a fixed interest rate and repayment plan.^[1][2] 

Differences between personal loans and credit cards 

A personal loan is a lump sum of money that’s paid back over a predetermined period of time, while credit cards offer a line of credit that accrues a balance and requires a monthly minimum repayment. Here’s a closer look at how personal loans and credit cards compare.^[1][2] 

At a glance: The differences between personal loans and credit cards

Personal loans 

A personal loan is a lump sum of money you can borrow for almost any purpose, such as consolidating credit card or other debt, paying moving costs, or making home improvements. With a personal loan, your interest rate is typically fixed and lower than most credit card interest rates, and you’ll have a set amount of time to pay the loan back.

Personal loans can be an effective financing choice in many situations—including those that involve larger cash sums that you want to pay off over time.^[1][2] Here are some common reasons to choose a personal loan:  

• You want to consolidate credit card debt. Credit cards tend to charge higher interest rates compared to other borrowing options. Using a personal loan to pay off higher-interest debt lets you fold multiple payments into one manageable payment with a more favorable interest rate and term, which can save you money.^[3] 

• You need a large amount of money. Generally, a personal loan gives you flexible access to more cash than a credit card does, without the drawback of racking up high interest on large purchases that can’t be paid off within a month or two. With a fixed and typically lower interest rate, personal loans can be used to make major purchases, handle big expenses, or fund important goals. 

• You prefer more control over your cash. Personal loans offer added flexibility when it comes to accessing and disbursing your money. Because funds are usually deposited directly into your bank account within days, you can decide when and how to fill a short-term cash need for an emergency or invest in a big purchase, managing your priorities as necessary. 

Personal loan pros and cons 

Before taking out a personal loan, it’s important to weigh the pros and cons. Here’s a breakdown of some of the key advantages and disadvantages of using a personal loan.^[1]    

Pros: 

• Large borrowing limits 

• Lower interest rate than most credit cards 

• Predictable repayment plan with fixed interest rate and monthly payment amount 

• Swift application and disbursement of funds 

• Positively impacts credit score with on-time payments 

Cons: 

• Loan repayment starts immediately 

• Required, fixed payments with interest 

• People with less-than-perfect credit may not qualify for the best rates or terms 

• Possible origination fee, prepayment penalty, or late fees 

• While not common, collateral may be required for secured loans 

Who a personal loan is best for  

A personal loan is best for people looking to borrow a large sum of money and pay it back over time. Consider a personal loan if you need to consolidate other debt, like high-interest credit cards, into one easy-to-manage monthly payment—often with a lower interest rate. A personal loan might also be best if you need to finance a large, one-time expense like a wedding, dream vacation, or home repairs.^{[1] [3]}   

Personal loans must be paid back with fixed monthly installments, so they’re a good option if you like to plan your monthly expenses upfront. People with excellent credit generally qualify for the best rates, highest loan amounts, and most flexible repayment terms. So personal loans may be a good choice if your credit is excellent. If you’re working on rebuilding your credit, consider waiting to apply until your credit improves—or ask a creditworthy family member or friend to be a co-borrower.^[1]   

Credit cards 

Credit cards are convenient financial tools for most people—in fact, according to the Federal Reserve, 82% of us have at least one. While credit cards can help pay everyday expenses, finance purchases, and build credit history, those perks can come with costs—especially if you struggle to manage credit wisely. When compared to personal loans, credit cards are more often used for smaller purchases and come with higher interest rates.   

Common reasons to choose a credit card include:   

• You want a reliable way to pay for important purchases. When you pay for something with a credit card, you're often protected against damage, theft, or loss of the item for as long as 90 to 120 days after the purchase. Known as purchase protection, this credit card benefit is kind of like short-term insurance for products you buy. 

• You want to take advantage of rewards programs. Many of the best credit cards offer perks like cash back, discounts, points, or miles on all purchases, letting you maximize rewards and save money simply by paying with your card. For example, you could use a card that offers the best grocery bonuses to do all your food shopping, earning free cash for regular purchases.^[4]  

• You want a backup plan. Credit cards give you the option to safely pay without cash, checks, or debit cards. And having a card on hand can give you peace of mind should you need it—even if you reserve it purely for emergencies.    

Pros and cons of credit cards 

Before using a credit card, it’s important to understand the pros and cons. Here are some key advantages and disadvantages of using credit cards.   

Pros: 

• Purchase and fraud protection 

• Widely accepted form of payment  

• No interest when monthly balance is paid in full 

• Options for rewards, discounts, or cash back on purchases 

• Responsible use can build positive credit history 

Cons: 

• Credit limits and interest rates can vary 

• Possible annual fees and late fees 

• Research needed to choose the best credit cards 

• Potential for high-cost credit card debt to accumulate 

• Credit score damage if used irresponsibly 

Who a credit card is best for 

Credit cards are a good option for people looking for a convenient, secure way to pay for everyday purchases. Consider a credit card if you need to make several smaller purchases. Credit cards are also handy in an emergency if you need to cover unexpected expenses like car repairs, broken appliances, or medical costs.   

A credit card may also be a good choice if you want to earn rewards for your spending on everyday purchases like gas, dining, or groceries. To avoid paying interest, credit cards are best for people who don’t carry a balance from month to month. People building (or rebuilding) credit may also benefit from using a credit card, but only when used responsibly.^[2][4] 

Do personal loans and credit cards affect your credit score differently? 

When you apply for a personal loan or credit card, the lender will perform a hard inquiry into your credit history. This usually makes your credit score drop by a few points. However, the effect is temporary and your score typically bounces back in just a few months.^[5]   

Once you have a personal loan or credit card, be sure to pay your bills on time. Your payment history is reported to the credit bureaus and plays a major role in determining your credit score. A positive payment history can help keep your credit on track, and even help boost your score, while a negative payment history can cause your score to drop. Defaulting on your loan or failing to pay a credit card could have serious consequences that affect your score for up to seven years.^[6]   

Using a credit card responsibly can also help give your score a boost, but it’s important to keep an eye on your credit utilization. Keeping your card balance under 30% of its credit limit typically keeps your credit healthy. In other words, don’t max out your cards, and pay your balance in full each month if you’re able to.^[6]   

The bottom line 

There’s a lot to think about when you’re evaluating pros and cons of a personal loan versus a credit card. Before you choose, you’ll want to consider how much money you need and how quickly you can pay it off. Then compare interest rates and fees, and weigh the overall cost of each borrowing option.

Research credit cards that meet your needs, or compare online lenders for the most competitively priced personal loan you can afford. To avoid an initial hit to your credit, look for lenders like LendingClub Bank that let you check your rate with just a soft credit pull. 

1.  Consumer Financial Protection Bureau. “What is a personal installment loan?” 

2. Consumer Financial Protection Bureau. “How does my credit card company calculate the amount of interest I owe?” 

3. Consumer Financial Protection Bureau. “What is the difference between credit counseling and debt settlement, debt consolidation, or credit repair?” 

4. Consumer Financial Protection Bureau. “Credit Card Rewards” 

5. Experian. “What’s the Difference Between a Hard and Soft Inquiry?”  

6. myFICO. “What's in my FICO Scores?”