Credit card vs personal loan: Which should you use?

If you need to finance everyday expenses, or even pay off debt, leaning on either a credit card or personal loan could help.

However, each product has unique features that could make it more beneficial, depending on what your specific goals are. Both credit cards and personal loans provide borrowers with access to money that can pay for major costs like home renovations or new fitness equipment (Peloton, anyone?), but they work a bit differently.

For starters, credit cards are revolving credit that can be used repeatedly, while personal loans are installment credit that can only be used once. The credit requirements are typically the same for either product, with lenders making different options available for consumers with bad, fair/average, good and excellent credit.

That said, you may want to stick to a credit card over a personal loan (or vice versa), depending on what you need money for. Ahead, we break down the basics of credit cards vs. personal loans, then help you decide when you should use one over the other.

Quick facts: Credit card vs personal loan

Credit card Personal loan
How you use them Buy now; pay later Buy now; pay later
How they work Receive a revolving credit limit Receive a one-time payment of cash
APR Interest rate can vary or remain fixed; current average is 16.28% Interest rate can vary or remain fixed; current average is 9.65%
Monthly payments Variable monthly payments; depending on how much you spend in a billing cycle Fixed or variable monthly payments; depending on the type of loan
Credit building Can help you build credit Can help you build credit

What is a credit card?

A credit card is a piece of plastic (or metal) that you can use to make purchases, and potentially pay off debt through a balance transfer. Credit cards provide revolving credit, so you can spend money, pay it off, then repeat the cycle all over again. Your credit line stays open until you decide to close it for good.

When you open a credit card, the bank or credit union that issues the card will provide you with an extension of money, known as a line of credit or credit limit. Credit limits can range from a couple hundred to thousands of dollars and ultimately depend on how much you can afford to borrow in the eyes of lenders (based on your credit score, income and other factors).

You’ll receive a statement every billing cycle that outlines all of the purchases you’re responsible to repay by the due date, or risk interest. The average interest rate on a credit card is currently 16.28%, according to the Fed.

Beyond interest, you may incur some other fees, including: annual, balance transfer, cash advance, foreign transaction and late payment fees.

Many credit cards come with grace periods, which allow you to pay off your balance interest-free for a minimum of 21 days from the end of a billing cycle. Any remaining balances after the grace period will incur interest charges.

Many credit cards offer rewards programs that let you earn cash back, points or miles on everyday purchases, like groceries and dining. Plus you may even qualify to receive a 0% APR period that could allow you to finance new purchases or debt for up to 20 months without interest charges.

What is a personal loan?

Personal loans are a type of installment credit. You receive a one-time payment of cash (usually by direct deposit) that you repay over the course of a predetermined term with interest rate. Since personal loans aren’t revolving, after you repay the loan, that’s it — you won’t receive any more money.

Just like a credit card, you’re required to make monthly payments which can be fixed or variable, depending on the structure of your loan (fixed or variable APR). The average interest rate for a 24-month personal loan is currently 9.65%, according to the Fed.

You can often pick the monthly payment and term length that works for your budget, and the interest rate will vary based on your creditworthiness, how big the loan is and how long you take to pay it back.

Like most financial products, personal loans charge more than just interest. You may incur a loan origination or administrative fee or penalty for paying off your loan early.

Personal loans don’t offer rewards, so you’ll be missing out on some of the lucrative perks unique to credit cards. The biggest benefit of personal loans is the ability to spread large purchases out over time with a predictable monthly payment — but that doesn’t mean they are cheap.

Bottom line: When to use a credit card or personal loan

Both credit cards and personal loans have multiple purposes. You can use either to pay for new purchases or consolidate debt, but the best choice really depends on your needs.

If you want to have access to revolving money, a credit card is your best option. You’ll receive a credit limit that you can continuously use, after you repay your bill. And if you want something to pay for everyday purchases and earn rewards, opt for a credit card.

But if you’re looking to finance large purchases or pay off debt over a long time period, a personal loan will generally be a better option than a credit card. Sure, you may qualify for a credit card’s intro 0% APR period, but it’s limited to a short six to 20 month period. That may work just fine for minor home renovations, but if you have bigger expenses, personal loans will provide you with a much longer time frame that can be up to 60 months or more.

When it comes to debt consolidation, it’s a toss-up between a credit card and personal loan. You’ll need to do some math to see which option will save you more money. Always get preapproved for either option and see what the interest rates, fees and other costs might be before you decide. (Check out how you can crunch the numbers on a 0% APR card and personal loan for debt consolidation.)

A hypothetical example:

Let’s say you want to make a $5,000 purchase and repay it over 24 months. If you used a credit card with the average 16.28% APR, you’ll wind up paying $891 in interest. If you take out a personal loan with the average 9.65% interest rate, you would only pay $518. In this case, it makes more sense to use a personal loan.

But if you qualified for a credit card with a 0% APR for 20 months, then a 16.28% APR, you’ll pay much less in interest: roughly $27. In this scenario, qualifying for a credit card with favorable perks would the cheapest option — which is why it always pays to maintain a good credit score.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the CNBC Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.