Personal Loan vs. Credit Card: How Does Each Option Stack Up?

You can borrow money using a personal loan. You can also borrow money using a credit card. While both provide you with the flexibility to access funds you can use for almost anything you want, there are very important differences between them. Find out about some of those discrepancies so you can decide which is the right choice for you.

Applying and accessing credit on a personal loan vs. credit card

You can apply for both a personal loan and a credit card online and can usually get a quick (or even instant) decision when you do so. Personal loans may ask for a little more information, like proof of income, although that really depends on the lender.

The big difference is that you can apply for a credit card any time and you'll get approved for a line of credit. So you can borrow up to that amount at any one given time. You could apply for a card and in two months or two years or five years, could access credit on it. You won't pay interest until you do access credit, and if you pay off your balance in full when the statement comes, you won't pay interest at all. As you pay down what you borrowed, you're also allowed to borrow more.

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With a personal loan, however, you have to specify how much you want to apply for and, if approved, the money will usually be deposited into your bank account within a few days (or even as soon as the same business day with some lenders). Interest will start accruing as soon as you get the borrowed funds, and you'll typically have to make payments monthly. And you can't just borrow more later -- you'll only get the amount you requested and can't withdraw funds again, even after you start making payments.

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Interest rates on a personal loan vs. a credit card

Interest rates also differ on a personal loan vs. a credit card. Typically, credit cards charge a higher rate. The average interest rate on credit cards is 21.47%, while the average interest rate on a personal loan is 12.35%. This usually means borrowing using a personal loan is more affordable.

However, sometimes credit cards offer 0% promotional rates. This means you get a special 0% rate on purchases for a limited period of time. Often, these promotions are available to new cardmembers and apply to purchases within the first 12 to 15 months of account opening. If you can qualify for a 0% APR and pay off the balance before it expires, you could get an interest-free loan for a year or even longer. That's a big advantage over a personal loan, since you start accruing interest right away on personal loans.

You can typically choose a personal loan with a fixed interest rate when you apply, so you won't have to worry about your rate and payment going up. Credit cards, on the other hand, typically have variable interest rates.

Repayment process for a personal loan vs. a credit card

When you take out a personal loan, you decide on your repayment timeline. You may decide to pay back the loan over two, five, or seven years. You'll have a set monthly payment schedule to ensure you pay it back. So you'll know upfront when your loan will be fully repaid and what it will cost you every month and overall.

With a credit card, you will pay a minimum payment that's usually around 1.5% to 2% of your balance.The minimum payment will typically go toward accrued interest, so you'll only pay down a little bit of principal. As a result, you could get stuck in debt for decades. A credit card minimum payment will generally be lower than a personal loan monthly payment, though, so it may seem more affordable even if it costs more over time.

It's worth considering all of these differences when deciding which option is right for you. If you can't qualify for a 0% APR card and you want a predictable, affordable loan so you'll know when you'll be debt free, a personal loan is a good option. But if you want the flexibility to borrow from a line of credit when and if you need it, or you can qualify for a 0% APR offer, then a credit card may be a better choice.