What is a personal loan?
A personal loan is money you borrow from a bank, credit union, or online lender that usually ranges from several hundreds of dollars to several thousands of dollars, or even more. Once you take out a personal loan, you agree to pay it back with interest through fixed monthly payments over a set term.
Personal loan terms vary but are typically between a few months to a few years. While a shorter term can lead to higher monthly payments, it will save you more in interest in the long run. On the other hand, a longer term may result in lower payments but increase your overall cost of borrowing. Most personal loans are very flexible, meaning you can use them to cover just about any planned or unexpected expense.
Let’s say you take out a $10,000 personal loan. If your loan has a 2-year term, you will repay the $10,000 with interest charges in equal monthly installments over two years. After you pay it off, you’ll need to take out another loan if you want access to more funds.
What is a credit card?
A credit card loan allows you to borrow money for the products or services you need or want. You may borrow up to your set credit limit, which is usually based on factors like your credit score and income.
You can make minimum payments but if you don’t repay your entire credit card balance by the due date, you will owe interest. Note that some credit cards come with perks, such as cash-back airline credits, merchandise, and gift cards.
If you spend $500 on your credit card, for example, but only pay $200 by the due date, you’ll carry the $300 balance into the next month and you’ll have to pay interest charges. As you make payments on your card, those funds will be available for you to borrow again.
What are the key differences between a personal loan and a credit card?
While personal loans and credit cards are two financing tools that can help you meet various financial goals, they’re not created equal. In fact, there are a number of noteworthy differences between the two products that can help you answer the question “should I use a personal loan or a credit card?”
Repayment structure
A personal loan has fixed payments. You receive a set amount of money and pay it back in equal monthly installments. It’s predictable, which is a huge plus as you can easily budget for it and won’t have to wonder how much you’ll owe.
A credit card, however, allows for more flexibility. You may continue to borrow as much money as you please, up to your credit limit. The caveat is that you have to be careful of interest charges, which can quickly become expensive if you don’t repay your balance in full by the due date.
Access to funds
With a personal loan, the money is delivered in a lump sum. In contrast, a credit card allows you to borrow funds through a revolving line of credit. You can withdraw as much or as little as you’d like up to your approved credit limit. However, you have to be disciplined with how much you spend or the interest can really add up.
Interest rates
There are key differences in loan and credit card interest rates. If you choose a personal loan, your interest rate will likely be fixed and lower than a credit card, especially if you have good credit. This makes it more affordable for larger, planned expenses. You won’t have to worry about your rate going up or down as it will remain the same throughout your loan term.
A credit card differs in that it usually carries a higher, variable interest rate. Some credit cards may offer 0% introductory rates for balance transfers or new purchases, but these promotional rates typically expire after several months. If you carry over a balance and don’t pay it off during the promotional period, your cost of borrowing can escalate quickly. Plus, some credit cards charge balance transfer fees. This makes credit cards a more expensive option for financing long-term debt compared to personal loans.
Credit impact
With a personal loan, timely payments can help your credit score. Using a personal loan to consolidate debt—like paying off high-interest credit cards with a lower-interest loan—can actually help your credit score. That’s because it lowers your credit card balances, which in turn brings down your credit utilization, or how much of your available credit you're using. Additionally, it can add to your credit mix, which accounts for about 10% of your FICO® Score.
A credit card, on the other hand, can impact your credit score based on your credit utilization, which is the ratio of your outstanding balance to your credit limit. Even if you make payments on time, high balances relative to your credit limit can lower your score. To keep your credit in check, be sure to keep the balance low and consistently pay your card off on time.
When does getting a personal loan make more sense?
Tyler Kovar, certified financial planner and founder of 11 Financial, provides prospective on when to choose a personal loan. According to Kovar, “If you have a large, one-time expense, like consolidating high-interest credit card debt, a personal loan is a good option. It gives you the stability of knowing exactly how much you’ll pay each month.”
Additionally, by shopping around for a good rate, a personal loan can save you thousands of dollars in interest and lower your overall borrowing cost. If you’re interested in debt consolidation, the BHG debt consolidation loan is one option to explore. You can check your rate without any impact to your credit.1
When is using a credit card the right move?
Credit cards are a good option when you don’t have a lot of credit card debt and are looking for a convenient way to make smaller, ongoing purchases for things like utilities, groceries, or gas.
“If you can repay the balance each month (or weekly, as I recommend), they can be a great tool for earning rewards like cash back. They’re also good for emergencies when you don’t have the cash available right away,” explains Kovar. If you do take advantage of credit cards, remember to pay them off quickly so you can avoid interest charges.
How do personal loans and credit cards compare for debt consolidation?
When it comes to consolidating debt, personal loans and balance transfer credit cards are two options to consider. With both options, you roll multiple high-interest debts into a single account with the goal of saving money on interest and simplifying the repayment process.
“However, personal loans are usually the better route. The interest rates on personal loans tend to be lower than credit cards, especially if your credit score is in good shape,” says Kovar. He also explained that with a personal loan, you’re less likely to get into financial trouble as you’ll know exactly what your monthly payments will be. “You won’t have to worry about continually adding to the balance like you might with a credit card,” adds Kovar.
While you can consolidate debt through a balance transfer credit card with a 0% interest rate for a set period of time, you’ll be on the hook for balance transfer fees. Also, if you don’t repay your debt by the time the intro period ends, which is usually anywhere from 12 to 21 months, you'll have to pay the typically much higher, non-introductory interest rate. In addition, if you have too much debt, a balance transfer card might not even be an option.
If you opt for a BHG debt consolidation loan, you may be able to consolidate up to $200,000.2 You could get funded in as few as five days3 and pay back your loan over a period of up to 10 years.2,4 As an added bonus, you’ll have access to a U.S.-based loan specialist who can guide you through the application process and help you make the best decision for your unique situation.
Personal loan vs credit card FAQ
Does a personal loan hurt your credit score more than a credit card?
Both a personal loan and credit card can impact your credit. Late or missed payments on your loan may lower your score. A credit card can damage your credit score if you borrow too much and your credit utilization rate (the amount of credit you’re using divided by the total amount available to you) is high.
Can you pay off a credit card with a personal loan?
Yes, you can repay a credit card with a personal loan. This process is known as debt consolidation. During debt consolidation, you take out a personal loan, ideally with a lower interest rate than the rate on your cards and use the proceeds to repay your credit card debt. Then, you pay back your loan via fixed, monthly payments over an agreed-upon term, potentially saving on interest over time.
Are there fees involved with personal loans or credit cards?
Personal loans and credit cards may come with fees. Personal loan lenders often impose origination fees and late fees but some don’t charge them at all. The most common credit card fees include balance transfer fees, late fees, and foreign transaction fees. Before you commit to any of these products, read the fine print so you’re aware of all fees and you don’t get hit with an unwanted financial surprise.
