Personal Loans vs. Credit Cards

Personal Loans vs. Credit Cards

Written by Bryan Daly
Fact-checked by Caitlin Wood
Last Updated December 22, 2022

Many consumers who need access to quick cash to cover an emergency expense may use their credit card. However, there are many other options to cover an emergency expense or a large purchase, ones with much lower interest rates.

Credit cards can make your purchase or expense more expensive than it needs to be. As such, if you’re looking to cover an unexpected expense or large purchase, consider taking out a personal loan instead. 

Personal Loans vs. Credit Cards

While personal loans and credit cards are easy enough to understand, both products involve different features, uses, and pros and cons, which is why research is key before you apply. Start with the basics, like learning how personal loans and credit cards work:

How Does A Personal Loan Work?

A personal loan is a specific amount of money that you can borrow from a lender and must repay (with interest) over several months or years. It’s intended to be used one time, to cover a larger expense, such as a financial emergency. Some lenders offer secured loans, which require collateral, while others provide unsecured loans, which don’t.  

Personal Loan Pros:

  • Borrowers with strong credit and finances can qualify for lower interest rates.
  • Different types of personal loans exist (student loan, home equity loan, etc.) 
  • Most loan payments are reported to at least one credit bureau, but always make sure you ask your lender.
  • The money is liquid cash that can be used to pay for almost any expense. 
  • Having collateral or a co-signer can help you obtain better rates and conditions.  

Personal Loan Cons:

  • Applying with bad credit, a low income or lots of debt can result in higher rates.
  • Some lenders (particularly banks) don’t approve applicants with weak finances.
  • If your loan is secured, a lender can seize your asset/collateral if you default.
  • Missing payments can also lead to penalties, added interest, and may affect your credit.

How Does A Credit Card Work?

A credit card also lets you borrow money, with interest. However, unlike a loan, a credit card is a type of revolving credit. This means you get to withdraw from a specific credit limit, which is the maximum balance that you can carry on your credit card. You must then repay what you borrow on a monthly basis in order to replenish your credit limit.   

Credit Card Pros: 

  • You can make a minimum payment or pay off your balance in full.
  • Most credit cards have minimal approval requirements and good credit limits.
  • Some credit cards come with rewards, like cashback and travel points.
  • Making timely and full payments is another way to help improve your credit.
  • The average minimum monthly payment is around $10.

Credit Card Cons:

  • Credit cards can have higher rates than loans (at least 12 – 20% in most cases).
  • Interest will accumulate on your unpaid balance until it’s paid in full.
  • If you’re not careful, you can easily rack up a ton of high-interest revolving debt.
  • Credit cards may not offer you as much money as a large personal loan would.

Requirements For A Personal Loan vs. A Credit Card

Applying for a personal loan can involve a bit more paperwork than a credit card. That said, you generally have to be a Canadian resident or citizen and at least the age of majority in your province or territory (18 or 19) to apply for either of these products. 

Personal Loan

Every lender has different requirements but most will ask for the following documents:

  • Government photo ID (passport, driver’s license, etc.) as proof of identity. 
  • Recent pay stubs, bank statements, or other proof of employment and income.
  • A recent utility bill, a copy of your rental agreement or other proof of address.

To qualify for a large personal loan with a low rate and flexible term, you usually need:

  • A minimum credit score of around 660 – 670 (the closer it is to 900, the better)
  • A steady source of income (ideally from a full-time job with a decent salary) 
  • A debt-to-income ratio of less than 30% – 35% (as few existing debts as possible)

Credit Card

To apply for a credit card, you must provide these personal and financial details:

  • Full legal name 
  • Date of birth
  • Social Insurance Number (SIN)
  • Home address 
  • Phone number(s)
  • Email address 
  • Employment history (current & previous) 
  • Gross annual income
  • Other active credit cards you have

Since the terms, interest rates, and conditions are already set, qualifying for a credit card can be slightly easier than it is for a personal loan. Nevertheless, you need to have:

  • A good credit score (although first-time credit users can qualify for basic cards)
  • No bankruptcies declared within the past 7 years
  • A yearly income that surpasses the lender’s minimum requirement 

Personal Loans vs. Credit Cards – Costs Comparison

Here’s a quick example to show you how much a personal loan can cost you compared to a credit card in Canada given that you’re making equal payments on both accounts:  

Personal Loan Credit Card
Loan Amount$5,000$5,000
Interest Rate7%19.99%
Monthly Payment $154.39$154.39
Term 3 years 3 years + 11 months (to cover your total balance)
Interest Paid$558.04$2,246.37
Total Paid $5,558.04$7,246.37

As you can see, a credit card can be more expensive over time due to the high-interest rates involved, especially if you pay your total balance off in installments like you would a personal loan. When possible, it’s best to pay full monthly balances to save on interest.   

How Do Personal Loans And Credit Cards Affect Credit? 

A personal loan and credit card can affect your credit scores in various ways. Here are a few ways your credit card and personal loan could affect your credit: 

Personal Loan

  • Credit History –  When you take out a personal loan, you’re opening a new credit account. This can affect the average age of your credit accounts, which could negatively affect your credit. Similarly, once you’ve paid of the loan and it’s closed, this too can lower the average age of your accounts. 
  • Payment History – So long as your lender reports your payments to the credit bureaus, every on-time payment you make will help you build a positive payment history. Similarly, every missed or late payment can negatively affect your credit. 

Credit Card

Like a personal loan, your credit card can affect your payment history and credit history. However, one factor that credit cards can affect but personal loans do not, is the debt-to-income ratio (aka credit utilization ratio). 

  • Debt-To-Credit Ratio – One of the most important factors in determining your credit score is your credit utilization ratio: the ratio between available credit and used credit. If you constantly have a maxed-out credit card or a card that only has a small amount of unused credit your score may be negatively affected. 

Should You Use A Personal Loan or A Credit Card?

Personal loans and credit cards have benefits and drawbacks that can make them good or bad for your financial profile. Make sure to weigh those pros and cons carefully, then add each product to your budget to see which one might work better for your finances. 

Personal Loan

A personal loan can be a very useful tool but is only a good idea to apply for when:

  • Your finances and credit make you eligible for affordable rates and payments.
  • You need to pay off large, one-time costs, like home repairs or high-interest debts.
  • You can afford to cover all your monthly payments on time, plus interest and fees.
  • You’re getting your money from a reputable lender offering the best conditions.

Credit Card

Similarly, a credit card is only a smart choice (or better than a personal loan) when:

  • You’re paying for smaller, recurring costs, such as groceries, clothes and gifts.
  • You qualify for rewards, promotions and other benefits (0% promotions, etc.).
  • You can make full monthly payments (minimum or partial payments will lead to more interest). 
  • You want a flexible payment solution that doesn’t drain your bank account right away. 

Personal Loans vs. Credit Cards FAQs

Can I use a credit card to pay a personal loan?

This depends on what kind of loan you have and how your lender operates. Some will accept credit card payments, others won’t. If they do, you can save on interest by using a credit card with a low-interest rate and paying off your loan as quickly as possible. Never forget to ask about your lender’s policies before you apply for a credit product. 

Should I use a credit card or a personal loan to consolidate my debt?

Personal loans usually have lower interest rates than other credit products, which makes it ideal for consolidating high-interest debts. Moreover, consolidating your debts means you’ll only have to worry about making one payment a month instead of five or however many debts payments you were making. If you find yourself in a situation where you can’t keep track of all your payments or if you’re simply looking to save on interest, a personal loan can save you money and help you manage your debts.

Do personal loans affect your credit utilization ratio?

While credit cards are revolving forms of credit, personal loans are typically installments. Since the “credit utilization ratio” doesn’t apply to installment loans, your personal loan won’t affect this factor.  

Not Sure If You Need A Personal Loan Or A Credit Card? 

The best way to know whether a personal loan or credit card is suited for your situation is by comparing lenders, interest rates, and terms of the loan. Remember, personal loans and credit cards come with serious financial responsibilities, so it’s important to do research, compare products and get as much advice as possible.     

Rating of 5/5 based on 1 vote.

Bryan is a graduate of Dawson College and Concordia University. He has been writing for Loans Canada for five years, covering all things related to personal finance, and aims to pursue the craft of professional writing for many years to come. In his spare time, he maintains a passion for editing, writing screenplays, staying fit, and travelling the world in search of the coolest sights our planet has to offer.

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