Personal Loan vs. Credit Card Debt: Which Costs More?

You owe $6,000 on a credit card with a 24% APR, and a lender offers you a personal loan at 12% for three years. At first glance, the answer looks obvious: half the rate must mean half the cost. However, the cheaper option depends on more than the APR. Indeed, fees, the repayment term, the monthly payment and, above all, what happens to the card afterward can change the result.

In other situations, though, the card is clearly the better choice. For example, if you pay the full statement balance every month, you may pay no interest at all, while even a cheap loan charges interest from day one. So in this comparison, we look at both options side by side, test them with real numbers and show the trap that sits on each side.

The short comparison

Typical rates from the Federal Reserve’s G.19 consumer credit data, although your own rates depend on your credit and the lender.

Also, these rates come from the Federal Reserve. In particular, recent data shows commercial banks charging around 11% to 12% on two-year personal loans, while cards that carried a balance averaged about 21% to 22%. Put simply, on average a personal loan costs roughly half as much per year as card debt. Still, an average is not your offer, and the rest of this lesson shows why the APR alone can mislead you.

You can check the latest figures yourself in the Federal Reserve’s consumer credit release (G.19), which reports the average rates banks charge on personal loans and credit cards. For a plain-language overview of how these loans work, see the Consumer Financial Protection Bureau’s guide, What is a personal installment loan?

The trap on each side

Each option also has its own psychological pull, so it helps to see both traps before looking at the numbers:

Interestingly, the card trap has a name in behavioral economics: present bias, our tendency to value today much more than tomorrow. In a study published in the American Economic Journal: Applied Economics, Present-Biased Preferences and Credit Card Borrowing, economists Stephan Meier and Charles Sprenger found that people with stronger present bias carried significantly more credit card debt. Since a card never forces an end date, it suits that tendency perfectly. A loan, however, builds the end date in.

A side-by-side cost example

Now let us test the original case. First, you owe $6,000 at 24% and can pay about $200 a month. On the other hand, the loan is $6,000 at 12% for 36 months, with no fee, and its payment is almost the same:

Original Money Behaves calculation, so it uses simplified monthly interest, fixed rates and no new card purchases.

Therefore, with practically the same payment, the loan saves about $2,080 and ends the debt 11 months sooner. In short, that is the strongest case for a personal loan: a much lower rate, no fee and a term that is not longer than the card would take anyway.

Test your own numbers

Next, use the bar chart below to compare your card with a loan offer. Specifically, it shows the total interest and fees of each option, and how many months each one takes.

How to use it: first, enter your card balance, its APR and what you can pay each month. Then add the loan APR, its term and any origination fee from the offer. As a result, the bars update as you type.

Then try adding a 5% origination fee and stretching the loan to 60 months. As you will see, the gap shrinks quickly, which is exactly what the next two sections explain.

When the credit card may cost less

Still, a lower loan rate does not always make borrowing worth it. In fact, the card can win in several common situations:

• You pay in full every month. For example, if you charge $1,500 and pay the full statement balance by the due date, your interest can be $0. However, a loan for the same amount would charge interest and maybe a fee.
• The balance is small and almost gone. For instance, paying a $150 fee to refinance $600 you will clear in two months rarely makes sense.
• You have a genuine 0% promotion. In that situation, it can stop interest for a while, as long as you know when it ends, what rate applies after and whether there is a transfer fee. See Balance Transfer vs. Debt Consolidation Loan.
• The loan term is much longer. After all, a lower rate over seven years can still cost more than a higher rate over two.

Also, if you are not sure how card interest builds up day by day, read How Credit Card Interest Works first.

When a personal loan may cost less

On the other hand, a loan usually helps when you are already carrying high-interest card debt and need time to repay it. Generally, the strongest case includes:

• Rate: a clearly lower APR, and ideally a fixed one.
• Fees: a small origination fee, or better still, none.
• Term: close to how long you would need anyway, but not longer.
• Payment: an amount that also fits your budget.
• Flexibility: no prepayment penalty, so you can pay it off early.
• Amount: enough money, so you can pay off the cards completely.

A loan also makes progress visible. For example, with a three-year schedule, the balance moves toward zero every month, as long as you do not borrow again. Meanwhile, issuers set a card minimum to keep the account current, not to clear the debt quickly, as we show in Minimum Payments: Why $90 Feels Right.

Fees can reverse the result

Now suppose the same $6,000 loan charges a 5% origination fee. So if the lender deducts it from the money you receive, you get only $5,700, which is not enough to clear $6,000 of card debt. As a result, you would need to borrow about $6,316 to end up with $6,000 in hand.

Consequently, the payment rises to about $209.77 and the total repaid to about $7,552. Admittedly, that is still less than the card’s $9,254, but the savings shrink by roughly $380. Moreover, with a bigger fee or a longer term, they could disappear. Before you accept, therefore, write down the approved amount, the fee in dollars, the amount you will actually receive, the APR, the payment and the total of all payments. Then follow the method in How to Compare Loan Offers, which walks through it step by step.

The step most people skip

Finally, here is the part that decides whether the loan really saves money: what happens to the cards after you pay them off. For instance, if the old cards stay at zero, the loan works as planned. However, if new purchases slowly fill them up again, you end up with the loan payment and new card debt.

Unfortunately, this is not rare. In fact, as we explain in How a Debt Consolidation Loan Works, credit data has shown card balances climbing back after consolidation for many borrowers. To avoid it, therefore, decide in advance how you will use the cards, for example only for one fixed bill paid in full each month, or keep them in a drawer. Closing them is also an option, of course, although it can raise your credit utilization, as explained in How Credit Utilization Works.

Common questions

Is a personal loan always cheaper than a credit card?

Not always. It is usually cheaper for carrying a balance over months or years. However, if you pay your card in full every month, the card can cost nothing while a loan always charges interest.

Does a personal loan help my credit score?

It can, but only indirectly. For example, paying off cards lowers your credit utilization, and on-time loan payments build your history. Still, the application adds a hard inquiry, and running the cards up again would undo the benefit.

What if I cannot get a loan with a lower rate?

Then a loan may not help. Instead, focus on a fixed payment above the minimum and a clear order for your debts, as shown in Debt Snowball vs. Debt Avalanche, and consider a nonprofit credit counselor if the payments still feel unmanageable.