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Credit card vs personal loan: which is better?

Alex Ritchie avatar
Alex Ritchie
- 4 min read
Credit card vs personal loan: which is better?

Personal loans and credit cards are two popular financing options for those looking to access credit, particularly when making major purchases. Choosing between a personal loan and a credit card can be a tough financial decision. Let’s explore whether a credit card or a personal loan may be better for your specific financial goals. 

Pros of personal loans

Pay for one-off expenses

Whether you’re planning a holiday, a wedding or home renovations, sometimes those big-ticket items are better served by taking out a personal loan. A lump sum loan payment may be a better financial fit for those who don’t want to take out a new credit card – and be tempted to keep using it – for one specific purpose.

This is because personal loans generally carry lower interest rates than credit cards on average. The average secured personal loan rate has historically fallen between 9-10%, whereas the average credit card rate is generally 16-17%. If you’re seeking finance for a one-off big expense and know you’ll pay interest on the purchase, this may be one way to keep costs down.

Avoid overspending

Speaking of accruing interest, if you’re the type of person who struggles with over-spending then a personal loan may be a better fit. A personal loan may provide you with only the funds you need and limits you from accessing more credit. By making regular repayments for the personal loan (typically at a fixed rate) you should pay it off within the loan term, compared to the risk of accruing more debt with a credit card.

Consolidate debt

A personal loan may also be a better financial option if you’re currently struggling with multiple sources of debt, such as a car loan and a credit card. A debt consolidation personal loan allows borrowers to manage repayments more easily across multiple sources of debt. By consolidating these debts into one personal loan, you reduce the amount of interest paid across multiple debts and simplify your repayments.

In comparison, a balance transfer credit card may be a helpful debt management option for those with credit card debts, but it offers little support for those with additional debt sources they cannot juggle, such as a car loan and a personal loan.

Pros of credit cards

Never pay interest 

It is possible to avoid ever paying interest on a credit card if you are financially responsible. If you are savvy with your budgeting and pay your credit card balance in full each statement period, you should never pay interest. Comparatively, a personal loan will always charge you interest even if you make timely repayments. Some providers may even charge you a fee if you try and pay your loan off early.

Keep in mind that there are low-rate credit cards available, which may come with interest rates lower than that of a personal loan.

Frequent flyer and rewards programs

Arguably the biggest advantage of having a credit card is the opportunity to earn rewards points or frequent flyer points.

The dollars you spend on eligible purchases could earn you rewards points. With rewards programs, you may exchange points earned on eligible purchases for perks like gift cards, appliances, home goods and electronics. You may also access benefits like concierge services, VIP seating for events and more. 

When your spending earns you frequent flyer points, you may exchange these points for benefits, like:

  • Airport lounge passes
  • Discounted flights and upgrades
  • Discounted accommodation
  • Domestic and international travel insurance
  • Rental car insurance

More flexibility for spending

With a personal loan, you are paid a lump sum that is typically used for a predetermined purpose, such as a holiday, a wedding, renovations, and more. With a credit card, you are offered far greater flexibility for spending as you may tap your card for any purchase - similar to a debit card. 

Further, once you pay off your credit card balance you have access to that same line of credit once again. A personal loan only offers a one-off lump-sum payment, whereas a credit card offers you the ability to keep spending up to your maximum credit limit over and over, as long as you repay your debt. 

It’s important to keep in mind that whether you opt for a personal loan or a credit card, both are ultimately sources of debt. Consider setting a budget and establishing how you will afford repayments on a personal loan or a credit card before considering either option.

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Product database updated 15 Jul, 2024

This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.