Personal loans vs credit cards: What’s right for you?
Kyla Friel, Content Specialist
Personal loans and credit cards are both common ways to borrow money, but they’re designed for different types of expenses and repayment timelines. While credit cards are convenient for short-term spending, carrying a balance at a high interest rate can quickly become expensive.
Recent consumer debt trends in Canada show that more borrowers are carrying higher balances, particularly on credit cards, which can make interest costs harder to manage over time.
In some situations, a personal loan may offer a lower-cost and more structured alternative. This guide breaks down the key differences between personal loans and credit cards and explains when each option makes the most sense.
Key takeaways
- Personal loans may make sense when you’re dealing with larger balances or expect repayment to take longer than a few months.
- Credit cards work best for short-term expenses that can be paid off quickly.
- Personal loans offer fixed payments and a clear payoff timeline, while credit cards provide flexibility but higher interest rates.
- Carrying a balance on a high-interest credit card can significantly increase the total cost of borrowing over time.
What’s the difference between personal loans vs. credit cards?
While both personal loans and credit cards allow you to borrow money, they work in very different ways.
A personal loan provides a fixed amount of money that you repay over a set period of time. Payments are typically fixed and made on a regular schedule, making it easier to plan and budget. Interest rates on personal loans are usually lower than those on credit cards, particularly for borrowers with strong credit.
Credit cards, on the other hand, offer revolving credit. You can borrow up to your limit, repay some or all of the balance, and then borrow again. Monthly payments vary depending on how much you owe, and interest rates are generally higher. While credit cards offer flexibility and convenience, that flexibility can also make it easier to carry credit card debt for longer than intended.
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Key differences between a personal loan and a balance transfer
|
Personal loan |
Credit card |
|
| Interest rates | Typically around 6%–14% for borrowers with good credit | Generally higher, often around 19%–23% |
|---|---|---|
| Fees | Some lenders charge an origination or administration fee of 0.5%–5% | Annual fees typically range from $0–$150; no borrowing fee beyond interest |
| Amount and type of debt | Larger amounts; can be used for many purposes, including debt consolidation | Smaller amounts; commonly used for everyday spending and short-term expenses |
| Repayment schedule | Fixed repayment schedule and fixed monthly payments over a set term | Flexible repayment; balance can be carried as long as minimum payments are made |
| Credit requirements | Good credit preferred; better credit typically means lower rates and better terms | Options available for fair to excellent credit, depending on the card |
| Impact on credit score | Can improve credit mix and build positive payment history with on-time payments | Credit utilization can increase quickly, but may improve as balances are paid down |
When a personal loan may be the better option
There are several situations where a personal loan can be a more effective and affordable borrowing option than a credit card.
1. Consolidating high-interest credit card debt
If you’re carrying balances on one or more credit cards, a personal loan can be used to combine those balances into a single monthly payment. This can simplify repayment and, in many cases, lower the interest rate you’re paying.
Having a clear payoff timeline can also make it easier to stay on track, since personal loans have a defined end date rather than an open-ended balance. This approach works best when new credit card balances are avoided after debt consolidation.
2. Covering a large, one-time expense
Personal loans are often better suited for larger, one-time expenses where paying the balance off quickly isn’t realistic. Common examples include home repairs, medical or dental bills, moving costs, or major car repairs.
Credit cards may not offer a high enough limit for these expenses, and carrying a large balance at a high interest rate can significantly increase the total cost over time. A personal loan spreads the cost out over a fixed term, which can make large expenses more manageable.
3. Wanting predictable monthly payments
Because personal loans typically have fixed repayment schedules, you’ll know exactly how much you owe each month and when the loan will be paid off. This predictability can make budgeting easier and reduce the temptation to borrow more while you’re still paying off existing debt.
4. Carrying a balance for more than a few months
Credit card interest compounds quickly, especially when only minimum payments are made. If you expect to carry a balance for several months or longer, a personal loan may reduce the total interest paid over time, even if the monthly payment is higher.
In general, personal loans tend to make more sense when you expect to carry a balance for months or years rather than weeks.
See also: Ratehub’s credit card interest calculator
When a credit card may still make more sense
Despite their higher interest rates, credit cards can still be the better option in certain situations.
If you can pay the balance off in full quickly, credit cards allow you to avoid interest altogether. This can be useful for short-term expenses that you know you can cover with upcoming income, such as everyday purchases or planned costs between paycheques.
Credit cards may also make sense if you have access to a 0% promotional or balance transfer offer, provided you’re confident you can pay off the balance before the promotional period ends. Otherwise, any remaining balance will begin to accrue interest at standard credit card rates.
Another advantage of credit cards is the added value they can provide through rewards and protections. Many cards offer cash back, travel points, extended warranties, purchase protection, and travel insurance benefits. These perks can offset costs or provide extra value on spending, but they only make sense if interest charges are avoided. Carrying a balance can quickly outweigh the value of rewards earned.
Credit cards can also be useful when you need short-term access to credit without committing to a fixed repayment schedule. For planned or everyday purchases that can be paid off quickly, this can be more practical than taking out a loan with set monthly payments.
When should you use a personal loan instead of a credit card?
Before deciding between a personal loan vs. a credit card, it’s worth stepping back and thinking through how you plan to use (and repay) the borrowed money.
How long will it take you to repay the balance?
If repayment will take only a few weeks or months, a credit card may be sufficient. If repayment is likely to stretch over a longer period, a personal loan’s lower interest rate and fixed term may help reduce the overall cost of borrowing.
What is the total cost of borrowing, not just the monthly payment?
Lower monthly payments can be appealing, but they don’t always mean a lower total cost. Credit cards with high interest rates can become expensive over time, even if minimum payments seem manageable. A personal loan may require a higher monthly payment, but could result in less interest paid overall by setting a clear repayment timeline.
Do you need flexibility, or would structure help you stay on track?
Credit cards give you control over how much you repay from month to month, as long as you meet the minimum payment. A personal loan provides certainty, with a fixed payment schedule and a clear end date. The better option depends on which approach helps you manage debt more effectively.
How will each option affect your credit score?
Both personal loans and credit cards can impact your credit score in different ways. A personal loan can improve your credit mix and build a positive payment history if payments are made on time. Credit cards can increase your credit utilization, which may lower your score if balances are high, but can also help your score as balances are paid down.
Is your goal to manage existing debt or fund a new expense?
Personal loans are often used to consolidate existing debt or cover large, one-time expenses. Credit cards are generally better suited for smaller or short-term purchases that can be paid off quickly.
There’s no single option that’s right for everyone. The best choice depends on how much you need to borrow, how long you’ll need to repay it, and how confident you are in your ability to manage the debt responsibly.
The bottom line
Both personal loans and credit cards can be useful borrowing tools, but they serve different purposes. A personal loan may make more sense for larger balances or longer repayment timelines, while credit cards work best when balances can be paid off quickly. Compare your options carefully and choose the one that fits your financial needs and repayment habits.