Personal loans vs. credit cards: pros and cons

Take a hard look at the differences between a personal loan and a credit card before making a decision. Thomas Barwick / Getty Images

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• Credit cards offer perks such as flexibility, rewards, and bonuses, but can make it easier to spend.
• Personal loans allow you to get cash upfront and spread out the cost of your borrowing over time.
• Personal loans have lower interest rates than credit cards and have a structured repayment plan.

When looking to borrow money, you might consider either taking out a credit card or a personal loan. 

Credit cards are more prevalent in the financial space — but they aren't the only way to get access to money. Personal loans are a less immediate, but often less risky, line of credit. There's absolutely a time and place for using credit cards, but sometimes, personal loans are the better option of the two.

Personal loan vs. credit card: At a glance

• A personal loan is a lump sum loan in which you'll receive your money all up front, and then pay it back often over the course of several years.
• A credit card is a revolving form of credit, meaning you can borrow up to a certain spending limit and then "replenish" that limit by paying down your card's balance. 

What is a personal loan?

For large purchases that don't have such convenient financing options, like a medical procedure, car repairs or a home renovation, a personal loan will give you a lump sum of cash. You know exactly how much you will have to pay back each month, you know how much will go to interest and how much will go to the principal, and you know the exact date you will be done paying.

See Insider's picks for the best personal loans >>

"The ideal reason to use a personal loan over a credit card is when you need to make a major purchase that could use up half or more of your available card credit and you don't plan to pay off the balance right away," says Michael Cetera, a Senior Credit Analyst at FitSmallBusiness.com. "Putting this level of expense on your credit card could have a negative impact on your credit score."

Taking out a personal loan will make a ding on your credit score when your lender conducts a hard inquiry, but it will quickly come back up to its previous number if you make regular payments. However, revolving debt on your credit card, especially approaching 30% or more of your total available credit, can drag your score down and keep it there until you start to pay it off.

"Generally speaking, installment loans (personal loans, mortgages, car, or student loans, etc.) are more favorable for your credit than revolving debt (lines of credit and credit cards)," says Anastasio. "Installment debt is deemed less risky than revolving debt. Having installment debt on your credit history can actually be helpful in boosting your score."

Example of a personal loan

Some of the best lenders that offer personal loans include:

What is a credit card?

Credit card repayment is based on the current balance held, which can grow based on your spending and on interest for an unpaid balance.  There is a minimum payment each month to cover interest charges. You can take as long as you want to pay off a credit card balance, but the longer you take, the more interest you pay.

See Insider's picks for the best credit cards >>

Splurges like new computers, furniture, or upgrading your mattress can cost more money than you might have on hand. However, many retailers will offer financing through a store credit card with a sweet 0% intro APR — an opportunity you should definitely take seize if you know you'll pay the full balance within the introductory period.

However, the higher interest rates on revolving credit card balances are a huge downside to financing major purchases on a credit card. If you know that you won't be able to pay off a balance for a long time, financing a purchase on a credit card will cost much more money in the long run than it would to pay for it using a personal loan.

"A heavily weighted factor when it comes to your credit score is your utilization ratio, which is the percentage of credit you have outstanding relative to the total amount of credit available to you," says Lauren Anastasio, a financial planner at SoFi. "Carrying a large balance on a credit card, regardless of interest rate, will likely jack up your utilization ratio, which can dramatically lower your credit score."

Example of a credit card

Some of the best lenders that offer credit cards include:

Personal loans vs. credit cards FAQS