Personal Loans vs. Credit Cards

Explore the key differences between personal loans and credit cards to see how they might affect your finances


Personal loans and credit cards can both help you borrow money. And they share some things in common. But as you look closer at the details, you’ll see some important differences.

This article will help you explore and compare personal loans and credit cards. By better knowing how they work, you may be able to better decide if one, or both, are right for you. 

What Is a Personal Loan?

Personal loans’ definitions can vary, but generally they refer to a kind of relatively small, unsecured loan that borrowers can spend as they see fit.

It’s unsecured because you don’t have to put money or collateral down first to be approved. 

That differs from loans like auto loans or mortgages. Those loans are secured because they’re backed by collateral—like the car or house being purchased. They also may have limits about how money can be spent. Funds for an auto loan, for example, may be required to go toward purchasing a car or truck.

What’s the Difference Between Personal Loans & Credit Cards?

Comparing personal loans and credit cards starts with understanding the difference between revolving credit and installment loans. 

Credit cards are an example of a revolving credit account. A credit limit is set, and as purchases are made, the available credit goes down. Then, as payments are made, the available credit is restored.

Personal loans, on the other hand, are an example of an installment loan. Personal loans are typically given to borrowers upfront as a lump sum. The loan is then paid back on a fixed schedule, typically for the same amount each month.

Loan Length

How credit cards and personal loans are structured is another difference. Credit cards are open-ended. So as long as a credit card account is open and in good standing, it’s available to use. Installment loans typically have a fixed length. And once the loan is paid off, the account is closed.

Fixed Interest vs. Variable Interest

While credit cards and personal loans both charge interest, there’s a difference here, too. 

Credit card interest rates, or APRs, are usually variable. That means they can increase or decrease based on something called index rates. But the Consumer Financial Protection Bureau (CFPB) says there are other times when a credit card’s APR could change, too—even if it has a fixed APR. Cardholder agreements have more details for individual cards, or the card’s issuer will provide a notice before a change is made. 

Personal loans are more likely to have fixed interest rates. That means the rate should stay the same for the length of the loan. But it’s important to check the full details of any loan agreement to understand how interest works.

Application Process

There are some similarities between credit cards and personal loans. During the application process, the lender may pull your credit to review your finances. Lenders do this to measure your ability to repay what’s borrowed, according to the CFPB. 

With both credit cards and personal loans, a higher credit score generally gives you a better chance at qualifying for and receiving a low interest rate.

Uses

Many personal loans and credit cards are unsecured. And funds can typically be used to pay for just about anything, as long as a seller accepts that form of payment and the terms of the loan are being followed. That said, there may also be examples of secured personal loans and secured credit cards.

When to Consider Using a Credit Card

Credit cards could be a good option when you

  • Want to pay for everyday purchases. Credit cards are good for making small, day-to-day purchases such as groceries, gas and bills. Keep an eye on your balance, though, because some of your credit score is based on how much credit you use
  • Charge only what you can afford to pay off. If you pay off your balance in full and on time every month, the CFPB says you usually won’t have to worry about paying interest on purchases. If you can’t pay off the balance, make sure you can at least make the minimum payment on time. You may be charged interest, but at least you’ll avoid negative information on your credit reports and potential fees or penalties.
  • Want a backup plan for emergency expenses. A credit card can help you cover unexpected expenses. But it could be a good idea to think about how to save for emergencies while paying off debt.
  • Want to take advantage of a low APR to consolidate debt. If you’re able to get approved for a card with a low or 0% introductory APR, you could use it to manage and consolidate debt.

If a credit card is used responsibly, there are plenty of benefits to be had:

  • There’s flexibility to pay down some or all of the balance—and then borrow again as needed.
  • You might be able to avoid paying interest if you pay off your balance each month before the due date.
  • Some credit cards come with cash back and travel rewards.

There are also a few things to consider before you apply for a credit card:

  • Some credit cards charge annual fees. Fees can be offset by the potential to earn bonuses or rewards, though.
  • If you’re carrying a balance, cards with variable interest rates may offer less predictable payments than fixed-rate loans.
  • If used irresponsibly, your credit could be hurt and your debt could grow.
  • If you need access to cash, there may be additional fees. 

When to Consider Using a Personal Loan

A personal loan could be a good option if you

  • Qualify for a loan with a predictable rate payment structure. Personal loans often come with fixed interest rates and monthly payments that are always the same. This predictability can make it easier to budget.
  • Need to make a large, one-time purchase. Personal loans can be used to make these types of purchases and spread payments over a few years. People making home renovations might consider personal loans. 
  • Need access to cash. If a personal loan doesn’t have spending restrictions, it could be good in emergency situations where cash is needed. 
  • Want to consolidate debt. Some people use personal loans to pay off and consolidate other debt. This might be a good option if you need several years to pay off the balance and if the interest rate on your loan is lower than the rate on your other debt.

The decision to apply for a personal loan is personal. Here are a few pros and cons to consider as you think about your situation:

Pros

  • You may be able to withdraw the funds as cash without paying fees.
  • These may come with lower interest rates compared to credit cards.
  • You can receive all of the funds upfront.

Cons

  • If you need more money after spending the funds, you’ll have to apply for a new personal loan, making it less flexible than credit cards.
  • Some personal loans come with an origination fee or other costs, which could eat into your access to the funds. 
  • If a personal loan is secured, such as a home-equity loan, it could carry extra risk.

How Do Personal Loans & Credit Cards Affect Credit Scores?

Understanding how personal loans and credit cards work—and using them responsibly—can help you build or maintain good credit. Here are some of the ways using these products can influence your credit:

  • Credit inquiries: Lenders and credit card issuers typically perform a hard inquiry when you apply to borrow money. This may temporarily lower your credit scores, but the impact is usually minor, according to the CFPB. The agency says applying for a lot of credit over a short period can give a bad impression.
  • Payment history: When you make payments, your lender may report the activity to the credit bureaus. And, the CFPB says, making on-time payments every month is one factor that helps build credit. But the opposite is true, too. Late payments may hurt your credit scores. 
  • Credit utilization and mix: The amount of credit you have versus how much you use also plays a role in your credit health. The CFPB says having a mix of installment loans and revolving credit is also a factor in some credit-scoring models.

Choosing Personal Loans or Credit Cards

Applying for a credit card or a personal loan is a personal decision. Before you apply for either one, consider how you plan to use the borrowed money.

If you need help understanding how personal loans and credit cards could impact your credit, you could use CreditWise from Capital One. It has a tool called the CreditWise Simulator, which can give you an estimate of how your credit score could be affected if you

  • Open a new credit card.
  • Apply for a loan.
  • Borrow money.
  • Consolidate your debt.

And with CreditWise, you can also access your TransUnion® credit report and weekly VantageScore® 3.0 credit score as often as you like—without hurting your credit. Plus, it’s free for everyone, Capital One customer or not. You can also visit AnnualCreditReport.com to learn how to get credit reports from each of the major credit bureaus.


Learn more about Capital One’s response to COVID-19 and resources available to customers. For information about COVID-19, head over to the Centers for Disease Control and Prevention

Government and private relief efforts vary by location and may have changed since this article was published. Consult a financial adviser or the relevant government agencies and private lenders for the most current information.

We hope you found this helpful. Our content is not intended to provide legal, investment or financial advice or to indicate that a particular Capital One product or service is available or right for you. For specific advice about your unique circumstances, consider talking with a qualified professional.

Your CreditWise score is calculated using the TransUnion® VantageScore® 3.0 model, which is one of many scoring models used by lenders. It likely won’t be the same model your lender uses, but it is an accurate measure of your credit health. The availability of the CreditWise tool depends on our ability to obtain your credit history from TransUnion. Alerts are based on changes to your TransUnion and Experian® credit reports and information we find on the dark web. The tool is not guaranteed to detect all identity theft.

The CreditWise Simulator provides an estimate of your score change and does not guarantee how your score may change.

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