3 Big Differences Between Personal Loans and Credit Card Debt

If you want to borrow money for something, you could potentially charge it on a credit card. Or you could get a personal loan to pay for it. Both forms of borrowing are flexible, as you can choose to charge almost anything on a credit card or can use your personal loan funds for just about anything you want.

But while there are similarities between personal loans and credit cards, there are also some important differences to know. Here are three of them. 

1. The interest rate

The interest rate is one of the biggest differences between credit cards and personal loans. Personal loans tend to have a much lower interest rate. In fact, the average credit card interest rate as of August 2023 is 21.19% while the average personal loan rate is 12.17%. 

However, there is one situation where a credit card could provide a lower rate -- when you qualify for a 0% introductory APR on purchases. Some card issuers offer this, although you'll have a limited time when the 0% rate applies, so this would be an option only if you were borrowing over a short period (generally less than 21 months). 

To make sure you are making the right choice between a credit card and personal loan, always compare the rates available to you so you don't end up getting hit with more financing charges unnecessarily. 

2. The payoff schedule

The payoff schedule is also a huge difference between personal loans and credit cards. When you take out a personal loan, it has a set payoff timeline (such as two or five or seven years). You find out upfront how much you'll be paying in total and when you'll be done sending money to your lender.

With credit cards, that's not the case. You will have a minimum payment due, and if you only pay the minimum, it could take you decades to become free of your credit card debt. 

Your statement will usually specify total costs if you pay only the minimum. However, since you'll have to decide how much extra (if any) to send in each month, it's not always immediately clear when you will really be done with repayment or how much you'll spend in total. And if you charge more on your credit cards as you're still working on paying off your current debt, this only complicates things further.

If you want to know exactly when you'll be free of the debt, a personal loan is the way to go. If you want more flexibility in how much you pay each month (above a small minimum), a credit card may be your preferred choice. 

3. The distribution of funds

When you borrow with a personal loan, you have to decide right away how much money you will need from your lender. You'll receive that entire amount in a lump sum after approval and start paying interest on the whole amount right away.

If you use a credit card, you get a credit limit, such as $500 or $2,000 or $20,000. You can charge up to that limit. You can charge it all at once or a little at a time. And if you pay back some or all of what you charged, you free up the credit and can borrow again.

If you are borrowing for a fixed expense, such as a home improvement project, and you know exactly how much you want and when, a personal loan could be a smart choice. You'll apply and receive that cash in your checking account upon approval.

But if you want to borrow over time, and you want to swipe your credit card for purchases rather than receiving funds into your bank account, a credit card is the smart choice. 

Ultimately, there are times when you should use a personal loan and other times when you should use a credit card. Now that you know these three big differences, you can make an informed choice in each situation about which option is right for you.