Are Personal Loans Cheaper than Credit Cards?

When you need help financing a purchase or paying off debt, you might find yourself comparing the options of taking on a personal loan or applying for a new credit card. But which one is better? Are personal loans cheaper than credit cards? There are many things to consider as you compare the two products, and the right answer for you might not come down to the numbers alone. Here are some considerations that may help to decide which product might be right for you.

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1. What do you pre-qualify for?

Before getting too far into comparing one product versus the other, it’s helpful to know what you can get. Hypotheticals can help highlight examples, but everyone’s credit situation is different, and yours will determine what kind of personal loans and credit cards you qualify for.

Luckily, it can be fairly easy to see what you pre-qualify for in terms of personal loans. Shopping around for loans that have rates and terms you want can be a great starting point. Consider searching for lenders you want to work with or searching online for personal loans.

When you apply to see what you can pre-qualify for, you’re not putting in a full loan application. Rather, you generally give a small amount of information to see what you might be approved for. Collecting a few pre-qualification offers enables you to see what options you might have without putting in full credit applications. Avoiding full credit applications means your credit shouldn’t take a hit as you compare what’s available to you.

As for credit cards, you can often do the same thing by searching for the credit cards or credit card issuers you’re interested in, and then seeing if they offer a pre-qualification application.

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2. Considering promotional offers

Many credit cards may come with promotional offers for purchases and balance transfers. For example, you might see a credit card offering 12 months no interest on purchases, or credit cards offering that amount of time or even longer for balance transfers used to pay off other debt.  

You’re not likely to see a promotional offer like this for a personal loan, which can make credit cards look immediately more attractive. That said, as soon as the offer expires, the interest rate will increase to that card’s standard APR.

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3. Comparing interest rates

Not everyone can qualify for credit cards with introductory offers, which is why it’s helpful to see what you pre-qualify for when you make these comparisons.

An interest rate on a personal loan, however, can be a lot more predictable if you opt for a fixed-rate loan. That said, variable rate loans often come with lower initial interest rates, which might make them more attractive out of the gate.

Noticing a pattern? You’ll likely get a better initial interest rate through a credit card or variable rate personal loan, but these products come with some risk. Therefore, when you compare interest rates, consider comparing the high end and the low end of variable rates with any fixed rates you’re pre-qualified for.

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4. Comparing payoff plans

Since promotional offers and variable rate loans can make interest rates hard to compare, it may help to think about what kind of payoff plan you had in mind. This can be easy with personal loans since you can often choose between a few different payoff timeframes.

But if you’re looking at a promotional credit card, it can be more difficult to calculate a payoff plan. That’s because you could be charged the standard interest rate unless you pay the card off before the promotional rate expires. And minimum payments on the card almost assuredly won’t get you to the amount needed.

One way to figure out a payoff plan for a credit card that has a zero percent interest promotional rate, divide the number of months you have until the rate expires by the balance you’ll be putting onto the card. The sum is how much you’d have to pay each month in order to pay the card off before the promotional rate expires.

Once you’ve done the math, it’s possible to compare how long you would have to pay off the balance on a loan, as well as what the monthly payment would be on both the loan and the credit card (and whether or not you can afford the monthly payment).

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5. Calculating fees

It’s easy to see that interest has a large impact on the cost of debt, but fees can sometimes squeeze by unnoticed. Here are a few fees you might see with a credit card:

• If you’re transferring a balance, keep in mind that some credit cards charge a balance transfer fee, which is typically around 3 to 5 percent of the balance you’re transferring
• If you plan to obtain a cash advance, there could be a cash advance fee
• If you pay late, some credit cards charge a fee and a penalty APR — meaning you could end up paying interest even if you have an introductory offer

Here are a few fees you might see with a personal loan:

• Some loans have an origination fee, which is a fee for taking on the loan and is typically a certain percentage of the loan balance
• Prepayment penalties, which are fees for paying off the loan early
• Late payment fees, though the way the fee is calculated depends on the lender (some charge a specific dollar amount and some charge a percentage of the balance)

Once you’ve narrowed down your top choices of credit cards and personal loans, read their terms to see exactly what fees you might encounter with each.

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6. Adding it all up

After you’ve collected all this information, adding it all up to see how the personal loans and credit cards you’re most interested in comparing is easy. As a recap, here are some helpful tips to consider:

• Make a vertical list of the best credit cards and personal loans you pre-qualified for
• Make a column for the interest rate (low and high if variable) and the cost of the fees you know you’ll have to pay no matter what, such as origination fees for personal loans or balance transfer fees if you’re transferring debt onto a credit card
• Make a column for the monthly payment (showing a range for variable rate loans and credit cards)

With these tips you should be able to see how the numbers add up under each loan and credit card you want to consider. Once you’ve seen these numbers, it should be easier to decide for yourself whether a personal loan will be cheaper than a credit card.

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Beyond the numbers: Which product is better for you?

Sometimes, the decision of what financial product to choose goes beyond the numbers. It’s also important to consider lifestyle factors as well as personal preference. Below are just a few examples of how these might override the numbers for you:

• You might find that a credit card would be cheaper for you, but still want to choose a personal loan because you’re scared you’ll fall deeper into debt if you have access to a revolving line of credit
• You might find yourself changing preferences because of whatever it is you’re financing
• How much you can afford to pay monthly might change your preference — for example, a personal loan with a shorter repayment period will cost you less in interest and get you out of debt faster, but you might not be able to afford the monthly payments unless you choose a longer repayment term

The moral of the story is this: Numbers are important, but so are your personal needs. When you’re choosing the best financial product for you, consider all the factors that are important to you before making your decision, so you can be sure you end up with the best price and a product you can handle.