Rate Ratio: Comparing Credit Cards and Personal Loans

Financial consumers often have a choice to make when it comes to making big personal expenditures and when trying to consolidate debt – take out a personal loan or use a credit card.

Each option has its benefits and drawbacks.

“Think of a personal loan like money in a bank account — it’s money you can use however you wish,” said Alex Miller, chief executive officer at UpgradePoints.com. “You can use it to pay a bill, withdraw it, or even use it to pay a credit card bill. For a credit card, you can only charge things to it, and can’t simply spend the money as you wish as many merchants won’t take credit cards or won’t take them for particular purchases.”

Financial experts say that if you’re borrowing money, personal loans are a stronger option.

“Generally speaking, for most people’s credit profile, it’s better to borrow money with a personal loan instead of on a credit card,” said Mike Pearson, founder of the personal finance site Credit Takeoff.  

Personal loans are more useful than credit cards for two reasons, Pearson said. 

• You can typically borrow a larger sum of money for a big purchase. “For example, on select personal loan platforms, you can take out a loan up to $100,000,” he said.
• Credit cards don’t offer that financial flexibility. “Most borrowers will have trouble getting a credit limit over more than $25,000, and that’s the case for even the most prestigious credit cards,” Pearson added.

Interest Rate Imbalance

Perhaps the biggest separator between personal loans and credit cards is their relative interest rates.

“Depending on your credit profile, you can get a personal loan with interest rates as low as 6%, which is a pretty good deal,” Pearson said. “If you were to borrow that money on a credit card, however, you’re looking at paying an interest rate of 15% and higher on most credit cards.”

Plus, personal loans add a longer repayment timetable relative to credit cards.

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“Personal loans have a lower interest rates, and the payment is extended over a longer period of time than on credit cards,” said Michael Cibik, a bankruptcy board certified attorney at Cibik & Cataldo, PC, in Philadelphia, Pa.

“In today’s economy a personal loan interest rate loan would probably be somewhere between 4%-and-7%, and the loan period would generally be 5-to-10 years, depending on the amount borrowed. Additionally, personal loans are normally on a fixed interest rate along with a fixed monthly payment rate.”

RELATED: Fixed vs. Variable Rate Personal Loans: Which Is Better?

According to Miller, interest rate payments should be a big priority for any financial consumer looking for credit or a loan.

“Interest can add up very quickly, and over time, can create more financial problems than there were at the begging of the loan process,” he said. “The amount of interest that will be accrued should be a big decision-making differentiator when choosing between a personal loan and credit card. A personal loan will tend to me more flexible and have a better interest rate, which, in most circumstances, means it’s a better form of payment versus a credit card when using towards a big-ticket purchase.”

RELATED: Personal Loan APR vs Interest Rate: Why You Need to Know the Difference

Personal Loans a Better Option?

The consensus among financial experts is fairly clear. For big financial moves, a personal loan is a no-brainer option compared to a credit card. “Not only can you take out more money with a personal loan, but your interest rate will be lower as well,” Pearson said.

There are, however, other options besides credit cards or a personal loan for large household expenditures.

“It’s a good idea not to take out any loan – either a personal loan or a credit card, which is basically a loan – for big ticket items,” said Joseph Toms, president and CEO of Freedom Financial Asset Management in San Mateo, Cal. “It’s far better to save up, with the help of a sound budget. However, if it’s impossible to save money, a personal loan will almost always be the better choice,” 

Tom said there’s one exception to that scenario.

“If you’re purchasing an item with a credit card and are absolutely positive that you will be able to pay it off in full at the end of the billing period (i.e., within the month), a credit card is a good choice, as you would not incur any interest,” he said.