Personal Loan vs. 0% APR Credit Card

While personal loans have lower annual percentage rates (APRs) than credit cards on average, some credit cards have a 0% APR promotional period. If you’re financing a purchase, 0% APR credit cards can be a low-cost borrowing option — provided you can pay the balance off before the promotional period ends.

But if you can’t pay the balance off in time, the standard APR resumes, which can make repayment more difficult. Personal loans, on the other hand, have set repayment terms, meaning there’s a specific end date to pay off your debt.

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Differences between 0% credit cards and personal loans

Personal loans and 0% APR credit cards are both good options for financing large purchases or major expenses, but they differ in important ways. Here’s a quick look at some of the major differences.

What is a personal loan and who can qualify?

Personal loans are flexible loans, usually for amounts between $600 and $100,000 or more, depending on the lender. Repayment terms typically last between one and seven years, but home improvement loans and RV loans may have longer repayment terms, such as 12 years. Personal loans can be used for almost any purpose, but common uses include consolidating debt at a lower APR and financing large or unexpected expenses. 

While personal loans on average tend to have lower interest rates than credit cards, according to the Federal Reserve, the rate you’re charged depends on your credit score and other financial factors, running the gamut from 6% to 36%. Personal loans also have fixed APRs, usually, which means the rate will never change while you’re paying off the loan. This is in contrast to variable rates, which fluctuate with market conditions.

Personal loans are typically unsecured loans, meaning collateral is not required to secure the loan, like a home or a car. However, some lenders offer secured personal loans that might have better rates if you have a low credit score. If you default, however, you will be at risk of losing your collateral.

Qualifying for a personal loan is usually a matter of having good-enough credit and a verifiable income stream. You can often prequalify for a personal loan, and it won’t impact your credit score. However, prequalification is not an offer of credit, but rather an estimation of what a lender can offer you. As a result, your final rate may be different. Also, once you proceed to a formal loan application, the lender will conduct a hard credit pull that could lower your score by a few points temporarily.

Pros and cons of personal loans

Here are the pros and cons to consider when taking out a personal loan.

Pros:

• Flexible: Personal loans deposit a lump sum in your account, allowing you to use that money for a wide variety of purposes.
• Set payment structure: Personal loans are usually installment loans with set APRs, meaning neither your APR nor your monthly payment will change over time.
• No collateral needed: Most personal loans are unsecured, meaning that you don’t run the risk of losing a valuable item if you miss payments or default on the loan.
• Fixed rates: Your rate won’t change while you’re paying off your loan, making your monthly payments predictable.

Cons:

• Can cost more than a 0% APR credit card: If you can pay off your credit card balance before the 0% promotional APR runs out, you may be able to save on interest using a credit card instead of a personal loan to cover an expense or consolidate debt.
• Origination fees: Some lenders charge an origination fee on personal loans — you’ll commonly see origination fees of between 1% and 12% of the total amount of the loan. That fee usually gets automatically deducted before the lender sends you the funds. For example, if you take out a personal loan for $1,000 and the lender charges an origination fee of 5%, $950 would be deposited in your account.
• Need a good credit score to qualify for the best rates: While personal loans can offer very attractive rates for borrowers with good credit scores, borrowers with lower scores will likely experience a much higher cost of borrowing.

What is a 0% APR credit card and who can qualify?

A 0% APR credit card has an APR of 0% for a set amount of time for promotional purposes. This usually ranges from 12 months to 18 months, depending on the credit card issuer. After the promotional period ends, a higher APR will kick in. If you are using the credit card to consolidate debt, a balance transfer fee may apply — these are usually around 3% to 5% of the amount you transfer to the card. So, if you transfer $1,000 in debt to your credit card, your balance would be $1,050 after the transfer, if the card has a 5% balance transfer fee.

These cards can be a great and inexpensive borrowing option as long as you can pay off your balance before the promotional period ends. Some credit card companies will end the promotional period early if you make a late payment or otherwise violate the terms of the card, immediately increasing the APR.

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Pros and cons of 0% APR credit cards

Here are the pros and cons of using a 0% APR credit card.

Pros:

• Can be a very low-cost or no-cost borrowing option: When used strategically, 0% APR credit cards offer a very inexpensive way to finance major purchases or pay off higher-interest debt.
• Flexible: Credit cards can be used for a variety of purchases, and you can borrow the exact amount you need — no more, no less.

Cons:

• Impossible or difficult to use for some things: Most lenders and rental companies won’t let you use a credit card to make payments such as mortgage payments, loan payments, or rent payments. Instead, you would have to take out a cash advance on the credit card, which is usually accompanied by a steep fee and a higher interest rate, then use that cash to make those payments.
• The 0% APR will end: If you’re unable to pay off your credit card balance before the promotional period expires, a much higher interest rate will apply, and it may take longer to pay off the debt.
• Variable interest rate: Once the standard APR resumes, your rate may change over the life of the loan, possibly leading to higher monthly payments.
• Balance transfer fees: If you’re using the credit card to consolidate debt, you will likely be charged a balance transfer fee. Common balance transfer fees are 3% to 5% of the total amount you’re transferring to the card.
• May be difficult to qualify for: Since credit cards are unsecured, lenders will determine whether you qualify based largely on your credit score and your income. Many lenders will require at least a good credit score, which for FICO scores may mean 670 or above.

Check Out: 6 Ways To Consolidate Credit Card Debt

Alternative options and loans for bad credit

If you have a low credit score and qualifying for a personal loan or a 0% APR credit card would be difficult, there are other options you can consider.

Payday alternative loans

Payday alternative loans, or PALs, are offered by federal credit unions and are meant as a lower-cost alternative to payday loans, which historically have had high costs and often predatory terms. There are two types of PALs, PALs I and PALs II — both have an interest rate cap of 28%.

PALs I loan amounts range between $200 to $1,000, with terms of one to six months, and the borrower must be a member of the credit union granting the loan for at least one month. PALs II have no minimum loan amount, but a maximum amount of $2,000, and terms of one to 12 months. There is no waiting period to take out a PAL II.

Home equity-based financing

Sometimes a secured loan, such as one backed by the equity in your home, will allow you to borrow at a more competitive interest rate. Home equity loans or lines of credit may allow you to borrow money at better terms than an unsecured loan, but beware — if you default, you could lose your home.

401(k) loans

Some 401(k) plans allow you to borrow from your account. While interest on these loans is paid back into your account, unpaid amounts may count as a plan distribution and have tax penalties. Additionally, if you leave your job, you may have to repay the loan in full to avoid paying income tax and penalties on the remaining balance.

Loans from friends and family

If you have loved ones who can help, it may be worth it to discuss borrowing the money you need from them. However, make sure you draw up a mutually understood agreement — then stick to it — to avoid damaging your relationship.

Personal loan vs. 0% APR card FAQ

Do you pay more interest on a credit card or a personal loan?

How much interest you pay on any loan or credit card will depend on a variety of factors, including interest rates, fees, how much you're paying monthly, how long the loan term is, and more. Personal loans often have lower interest rates than credit cards, but credit cards may have 0% APR promotional offers that can make them a better option in some cases.

How does borrowing affect my credit score?

How borrowing affects your credit score will depend on your overall financial situation and how well you manage the loan. Payment history is the most important part of your score, so making timely payments is a good way to improve or maintain it. However, if you’re using a large percentage of your available credit, your score could drop.

On the other hand, if you don’t carry a lot of debt and are adding a new type to your credit mix, that may positively impact your score. It should be noted, however, that formally applying for personal loans and credit cards will trigger a hard inquiry on your report, dropping your score a few points temporarily. 

Is a personal loan or credit card better for debt consolidation?

If you qualify for a 0% APR promotional offer on a credit card and can repay the balance in total before the promotion ends, it may be the better option. However, if you need a longer repayment term with a fixed rate, a personal loan for debt consolidation may be the wiser choice.

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