Personal loan vs. credit card — when to use each one

You’ve probably heard that it’s best to pay cash for all of your expenses, but that isn't feasible for many consumers. Countless studies have shown that a good portion of Americans would have a hard time covering a $1,000 emergency.

So whether you’re looking to cover an unexpected expense or finance a large purchase, personal loans and credit cards can help. Both options give you access to the financing you need, though on very different terms.

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Personal loan vs. credit card: What you need to know

When you open a credit card, you’re taking out a revolving credit line, which means you can borrow the funds as you need them. You’ll receive a statement at the end of the month with a minimum payment due based on the current amount you owe.

Credit cards essentially have a grace period in which you are not charged interest as long as you pay the outstanding balance in full. You'll be charged interest for any balance that is carried over from month to month. It’s easy to become trapped in a cycle of credit card debt where you continue to spend money on the card faster than you can pay it off.

In comparison, a personal loan is an installment loan, which means you’ll receive a one-time lump sum that you’ll pay off in fixed monthly payments. Personal loans tend to come with a lower interest rate than credit cards, and borrowers with good credit will qualify for the best rates.

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When should you use a credit card?

Credit cards tend to be best for smaller, ongoing purchases. For instance, if you regularly travel for work and are looking for ways to reap credit card rewards, taking out a travel card might make sense.

You can take advantage of the unique rewards offered by credit cards, like cash back or travel miles, all without paying a penny in interest as long as you pay off the balance in full by the end of the month. And one of the advantages of using credit cards is the borrower protections that come with it.

Some credit cards try to woo potential customers by offering an introductory 0% APR offer, which typically lasts up to 18 months. When the introductory zero-interest period expires, you'll be charged interest on the outstanding credit card balance.

These types of credit card offers are typically reserved for borrowers with good credit. If you can qualify for an introductory 0% APR offer on a credit card, it may make sense to put a larger purchase on a credit card, just make sure you have a plan for how you’ll pay off the balance.

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When should you use a personal loan?

Personal loans tend to be best for large, one-time purchases, like a home improvement project. It’s also a good option for debt consolidation. You know exactly how much you need to borrow, and you’ll have consistent monthly payments. This type of predictability is one of the biggest advantages of taking out a personal loan. You can even use a personal loan calculator to estimate your monthly payments.

Since these unsecured loans are backed only by your promise to repay the lender, your eligibility is based on your credit score. Personal loans are best for borrowers with a good credit history, but some lenders offer personal loans for bad credit. Even if you can’t qualify for the lowest rates on a personal loan, they may still be lower than what you’d get with a credit card.

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How to make the right choice for you

Personal loans and credit cards are both good financing options, and the one that’s right for you will depend on how you plan to use the funds. If you’re looking to finance a large, one-time purchase or consolidate debt, then a personal loan is probably your best bet.

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