Personal Loans vs Credit Cards: Comparing Rates, Fees and Repayment
How the two compare on interest, fees and how fast the debt is paid off, with a worked example.
In this guide
Key takeaways
- Personal loans usually have a fixed rate, a fixed monthly payment and a set end date.
- Credit cards are flexible, but their interest rates are often higher and there's no set payoff date.
- Some personal loans charge an origination fee, so compare the APR, not just the interest rate.
- For a large balance you plan to repay over a few years, a loan can cost less in interest.
Introduction
Personal loans and credit cards are two of the most common ways to borrow money. Both are usually unsecured, which means you don't put up your home or car as collateral. But they work in very different ways, and the difference can add up to hundreds or even thousands of dollars in interest.
This guide explains how each one works, what it costs, and how to compare them for your own situation.
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How a personal loan works
With a personal loan, you borrow a set amount of money and receive it as a lump sum. You then repay it in equal monthly installments over a fixed term, commonly between two and seven years.
- Fixed rate: most personal loans have a fixed interest rate, so your payment doesn't change.
- Set end date: if you make every payment, the loan is fully repaid at the end of the term.
- One-time use: once you've received the money, you can't borrow more without applying again.
Lenders look at your credit history, income and existing debts to decide whether to approve you and what rate to offer.
How credit card borrowing works
A credit card gives you a credit limit you can use, repay and use again. This is called revolving credit.
- Variable rate: most card interest rates are variable and can change with market rates.
- Minimum payments: you only have to pay a small minimum each month, but paying only the minimum keeps you in debt much longer.
- Grace period: if you pay your full statement balance by the due date, you usually pay no interest on purchases.
Credit cards are useful for everyday spending you clear each month. They become expensive when a balance is carried for a long time.
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The annual percentage rate (APR) shows the yearly cost of borrowing. Credit card APRs are often above 20%. Personal loan APRs vary widely, from single digits for borrowers with strong credit to much higher for those with weaker credit.
When you compare offers, always compare the APR rather than the interest rate alone. For a loan, the APR includes some fees, such as an origination fee, so it gives a truer picture of the cost.
| Personal loan | Credit card | |
|---|---|---|
| Rate type | Usually fixed | Usually variable |
| Monthly payment | Same every month | Changes with balance |
| Payoff date | Fixed term | None, until the balance is cleared |
| Common fees | Origination fee, late fee | Annual fee, late fee, cash advance fee |
| Reuse the credit | No | Yes |
Fees to watch for
Personal loan fees
- Origination fee: a one-time charge, often a percentage of the loan, usually taken from the money you receive.
- Late payment fee: charged if a payment is late.
- Prepayment penalty: uncommon, but some lenders charge a fee if you repay early. Check before you sign.
Credit card fees
- Annual fee: charged by some cards every year.
- Late fee and penalty APR: a late payment can trigger a fee and, on some cards, a higher interest rate.
- Cash advance fee: withdrawing cash with a card usually costs a fee plus a higher rate, with no grace period.
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A worked example
Here's how the numbers can compare on a $5,000 balance. The figures are rounded and for illustration only.
| Personal loan | Credit card | |
|---|---|---|
| APR | 12% fixed | 22% |
| Monthly payment | About $166 | $166 (same amount) |
| Time to pay off | 36 months | About 45 months |
| Total interest | About $980 | About $2,340 |
In this example, the loan costs about $1,360 less in interest and is paid off nine months sooner. If the loan had a 5% origination fee, you'd need to borrow about $5,260 to receive $5,000. The total cost would rise to about $1,290, which is still less than the card in this case.
The result depends on the rates you're actually offered. A loan with a high APR, or a card with a 0% intro rate, could change the answer.
When each option can make sense
A personal loan may suit you if:
- you need a larger amount for a one-off cost, such as a repair or consolidating several debts
- you want a fixed payment and a clear end date
- you can get an APR lower than your card rate
A credit card may suit you if:
- you can pay the balance in full each month
- the amount is small and you'll clear it quickly
- you qualify for a 0% intro APR and can repay before it ends
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How each affects your credit
Applying for either usually leads to a hard inquiry, which can lower your score slightly for a short time. Many lenders let you check your rate with a soft inquiry first, which doesn't affect your score.
Credit scoring models look at how much of your available card credit you're using. Moving card debt to an installment loan can lower that figure, but the most important factor is still paying on time, every time.
How to compare offers, step by step
- Check your credit first. You can get your credit reports at no cost from AnnualCreditReport.com. Fix any errors before you apply.
- Prequalify with a few lenders. Many show your likely rate with a soft check, so you can compare without affecting your score.
- Compare the APR and the total repaid. A lower monthly payment over a longer term can mean paying more in total.
- Read the fee section. Look for origination fees, late fees and any prepayment penalty.
- Check how the money is paid. Some debt consolidation loans pay your card companies directly. Others send the money to you.
- Plan for the cards. If you use a loan to clear card debt, decide how you'll avoid building the balances back up.
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Questions to ask a lender
- Is the rate fixed or variable?
- Is there an origination fee, and is it taken from the loan amount?
- Is there a penalty for paying the loan off early?
- What happens if a payment is late?
- Can I choose my payment date?
- How soon would I receive the money?
Be wary of any lender that guarantees approval before checking your details, or asks for a fee upfront before you receive the loan. The Federal Trade Commission warns that these are common signs of loan scams.
Conclusion
Personal loans offer structure: a fixed rate, a fixed payment and an end date. Credit cards offer flexibility, but carrying a balance can be costly. Compare the APR, all fees and the total amount you'll repay, and choose the option you can pay off comfortably.
Common questions
Is it better to pay off a credit card with a personal loan?
It can be, if the loan's APR is lower than your card's and you avoid building up a new card balance. Compare the total cost, including any origination fee.
Can I check personal loan rates without hurting my credit?
Many lenders offer prequalification with a soft credit check, which doesn't affect your score. A formal application usually involves a hard inquiry.
Do personal loans have variable rates?
Most have fixed rates, but some lenders offer variable-rate loans. Check the loan agreement before you sign.
Sources and further reading
This guide is general information, not financial advice. Rates, fees and terms vary by provider and can change. Always check the provider's own terms, and consider speaking to a qualified financial professional about your situation.
