Should You Use a Credit Card or Get a Personal Loan? Ask Yourself These 3 Questions to Decide

In a perfect world, you'd pay for everything you buy with cash out of your savings account. In the real world, that's not very realistic for most people. It's very common to need to make a big purchase that you can't cover with your bank balance, and therefore need to borrow for.

When you do borrow, chances are good you'll have the opportunity to choose between using a credit card or getting a personal loan. If you have that choice, there are a few key questions you should ask yourself to decide which option is right for you.

1. What are the interest rates available to you?

Interest is the cost of borrowing, and you don't want to pay more than necessary to borrow for your big purchase. So, you'll need to focus on whether you will pay less interest by using a credit card or a personal loan.

According to the Federal Reserve Bank of St. Louis, the average credit card interest rate as of February 2024 is 21.47%, and the average personal loan rate is 12.35%. So it may seem like an easy call that you should opt for the personal loan. But you should also consider whether a credit card promotional offer could give you a lower rate than 12.35%.

Some credit cards offer 0% APR introductory rates. One example is the Discover it® Cash Back, which offers an introductory interest rate of 0%, 15 months on new purchases (see rates and fees). Once the intro period ends, the card has a 17.24% - 28.24% Variable APR. If you're able to pay off your full balance by the time the 0% intro APR expires, then the card might actually be the cheaper option.

Of course, personal loan and credit card rates can vary based on the financial institution issuing them, as well as your financial credentials. You should compare rates on both kinds of debt -- taking into account personalized offers that you can often research online -- so you can decide which method of borrowing makes the most sense.

2. How much do you need to borrow?

You'll also need to consider how much you're hoping to borrow. Many personal loan lenders, like LightStream, allow you to take out loans of up to $100,000 (assuming you have good credit and enough income to show you can pay them off).

Credit card companies, on the other hand, are probably not letting you borrow that much. In fact, depending on age, the average credit limit is between $11,290 (for Gen Z) and $40,318 (for baby boomers). Your own limit may be above or below that amount.

It's always a good idea to take into account how much you'd be allowed to borrow with both cards and personal loans to make sure the choice you make will offer enough funds to accomplish your goals.

Also remember that with a credit card, you'll have access to a line of credit but don't need to borrow the entire amount all at once. You can charge purchases over time and, as you pay back what you've charged, you can borrow more. With a personal loan, though, you decide upfront how much you need and get that whole amount in a lump sum -- and then you can't borrow any more unless you get a new loan.

3. What will your repayment look like?

Finally, you need to consider what repayment will look like. If you've borrowed with a credit card, you'll have low minimum payments (usually equal to around 2% of your balance). And you could get stuck in debt for decades since so much of each payment you make goes to interest rather than reducing your principal balance. Plus, if you have a long payment timeline but you took advantage of a 0% intro APR, it's very possible you won't be able to pay it back before the promotional rate ends if you only make the minimum payments. You'll get stuck paying higher interest on all the debt left after the 0% intro APR is gone.

With a personal loan, on the other hand, your loan will have to be paid back on a set schedule you agreed to with the lender before borrowing. This can provide you with much more certainty if you want to know when you'll be debt-free. And the timeline is going to be a lot shorter than if you were making minimum credit card payments. If you took out a five-year personal loan, for example, as long as you make the payments, you'll be done with the debt after five years.

Ultimately, you need to consider all three of these issues when deciding what's best. If you want an affordable interest rate, a fixed repayment schedule, a larger loan amount, or you don't qualify for a 0% introductory APR credit card offer, a personal loan is the best choice. But if you want to pay no interest for a while (and a card is offering that) or if you want the flexibility to charge items over time rather than getting a lump sum of money, then a credit card may be the better choice for you.