Personal Loan vs. 0% APR Credit Card: Which Is Better?

Household debt is on the rise nationwide, and you may be looking for ways to manage high balances or finance a major purchase. Personal loans and 0% APR credit cards are two common options, though each has its pros and cons.

A 0% APR credit card can give you breathing room to pay off debt before the interest rate adjusts when the promotional period ends. A personal loan has a fixed rate and, typically, a years-long repayment period, which can lower payments and offer a predictable payoff timeline.

Compared to carrying high-interest credit card balances, either option can save you money if used wisely. But which is best for you?

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.

How personal loans work

A personal loan is an installment loan. It provides a lump sum of money to either you or your creditors that you repay over time through fixed monthly payments. Each payment includes some of the loan's principal and interest — expressed as the annual percentage rate (APR), which accounts for interest rate and any upfront lender fees.

According to Federal Reserve data, personal loans have lower APRs than credit cards — averaging 11.57% for two-year loan terms. But APRs can range from 6.49% to 35.99%, depending on your credit score and other factors.

Your repayment term — typically two to seven years for a personal loan — can also influence your APR, with longer terms generally increasing APRs. Your income and the loan’s purpose can affect a personal loan’s interest rate as well.

How to get a personal loan

When you apply for a personal loan, most lenders ask for proof of income and conduct a hard credit inquiry, which can temporarily lower your credit score by a few points.

If approved, you'll typically receive loan funds within a few business days, although some lenders deposit funds as soon as the same or next business day.

Learn More: How Do Personal Loans Work?

Pros and cons of personal loans

Pros

• Potentially high borrowing limits: Although the maximum loan amount for most lenders is in the $50,000 range, a few lenders may offer personal loans of up to $100,000. 
• Various uses: You can use a personal loan for a wide range of purposes, such as debt consolidation or home repairs. 
• Fixed rates: Personal loan interest rates are typically fixed rather than variable. 
• Predictable payments: Thanks to a fixed interest rate and loan term, your monthly payments stay the same.
• Quick funding: Many lenders deposit your loan funds into your bank account within a few days, and some offer same-day or next-day funding. 
• No collateral: Personal loans are commonly unsecured, so you don't risk losing your home, car, or other assets if you don't repay an unsecured loan.

Cons

• High APRs for poor credit: Borrowers with lower credit scores may face APRs of 30% or higher, which can exceed some credit card APRs. 
• Fees: Some loans have an origination fee between 0% and 15% of the total loan amount, which may reduce the amount you receive.
• Best rates reserved for excellent credit: You'll usually need a strong credit profile to qualify for the lowest personal loan rates. 
• Long repayment term = more interest: Opting for a long repayment term lowers your monthly payment but results in more total interest paid.  

How 0% APR credit cards work

A 0% APR credit card has a promotional period during which you'll pay no interest on the balance. Promotional periods typically last 12 to 18 months.

When the promotional period ends, your remaining balance is subject to the card's regular APR. In other words, if you can pay off the entire balance before the rate adjusts, you can enjoy an interest-free loan. However, if you’re transferring a balance, most cards have a transfer fee of 3% to 5% of the amount being transferred — a cost to think about if you're using a 0% APR card to consolidate debt. 

Bryan Kuderna, certified financial planner and founder of Kuderna Financial Team, warns that while 0% APR credit cards can be enticing, it's important to use them with care and have a “firm exit plan to pay the balance in full” before the promotional period ends. “0% promos and other teaser rates sound great, but lenders are able to offer them because they know enough borrowers will carry their debt past the promo period and begin paying high interest thereafter.”

Credit card issuers typically require a hard credit check before approving you for a card. You often need to disclose your annual income when applying.

Pros and cons of 0% APR credit cards

If you're thinking about using a 0% APR credit card, weigh these pros and cons first.

Pros

• Potentially no-cost borrowing option: If you use a 0% APR credit card for a new purchase and pay the balance before the promotional period ends, you can avoid interest charges.
• Low-cost for short-term debt consolidation: Using a 0% APR credit card to transfer high-interest debt could help you save money, especially if you pay off the card by the end of the promotional period.
• Purchasing flexibility: You can use your card for everyday purchases or emergencies as needed. 
• Rewards and perks: Many credit cards offer cash back or points for new purchases, which add extra value if you pay on time.

Cons

• Promotional period is temporary: If you don’t pay off the balance before the promotional period ends, you'll start paying interest at the card’s standard rate — which could be around 30% APR or more.
• Variable interest rate: After the initial promotion, your standard APR can fluctuate, making costs harder to predict. 
• Balance transfer fees: 0% APR credit cards commonly charge 3% to 5% to transfer balances. For instance, if you transfer $3,000 to a card with a 5% fee, you’d add $150 to your balance.
• Can be difficult to qualify for: Credit card issuers usually prefer good to excellent credit profiles — FICO scores of 670 or above — for 0% APR credit card approval. 
• Temptation to overspend: Credit cards provide easy access to credit, which could lead to carrying more debt than you originally planned.

Impact on credit

Whether you choose a 0% APR credit card or a personal loan, either will impact your credit. 

• Temporary credit score dip: Expect your credit score to dip a few points after applying for either a personal loan or 0% APR credit card. This is due to the hard credit check typically required during the application process. 
• Improves your credit mix: A personal loan is an installment loan; a credit card is a revolving credit line. Adding either one to your credit report can improve your credit mix (and, therefore, your score) if you don't already have that type of account. 
• Adds a new credit account: Opening a new line of credit — installment or revolving — lowers the average age of your credit accounts. Length of credit history makes up 15% of your total credit score. (A longer credit history is better.)
• Can reduce credit utilization: Credit utilization is unique to revolving credit lines. It measures the amount of credit you use relative to how much you have available. By increasing your available credit, you reduce your credit utilization, which can improve your score. Keeping your credit utilization below 30% of your total credit limit is generally the goal. 
• On-time payments: On-time payments influence 35% of your credit score, making it the most impactful factor. This is why it can be wise to choose a longer-term personal loan with a higher APR (relative to a 0% APR credit card) if you can get lower payments.

Examples of when either option is a better choice

Different forms of credit exist for various borrowing needs. For some, a flexible credit card with a 0% APR promotional period might work better than a more rigid personal loan, or vice versa. Here are a few scenarios when one option could outweigh the other.

Scenarios when personal loans make more sense

• You need a fixed monthly payment: With a fixed rate, your loan payment won't change throughout its term, unlike a credit card with a promotional rate. “I don’t recommend pursuing the card route if it requires juggling balances or if you lack a stable income,” says Epps. “Predictable and straightforward beats clever and risky every time.”
• You need more time: You'll also get more time to pay a personal loan, in most cases, which is helpful for borrowers who aren't 100% confident they can pay off their card balance — or avoid adding new charges to it — before its promotional period ends.
• You need cash: Personal loans are also a better fit for some expenses that you typically can't pay with a credit card, like private contractors or some utility bills.
• You need more money: An installment loan can generally help you access higher borrowing limits than a credit card.
• You’re consolidating credit card debt: A distinct advantage of personal loans is that they don’t impact your credit utilization. So if you use one to pay off credit card debt, you can swiftly decrease your credit utilization (as long as you keep the cards open) and thereby improve your credit score. 

Scenarios when 0% APR credit cards make more sense

• You can pay off the balance within the promotional period: This is key to getting the most benefit out of a 0% APR credit card.
• You can benefit from rewards and perks: A credit card could make more sense if you’re eligible for a sign-on bonus — like if you spend a certain amount within three months — and can comfortably pay off the balance before the rate adjusts. 
• You’ll pay off new purchases monthly: If you can pay off your balance monthly, a credit card can be a great tool for temporary interest-free financing. 
• You need to transfer a small balance: Say you have $1,000 left to pay on a credit card with a 30% APR. Your payment would be around $100 per month to pay it off in 1 year, and you'd pay $170 in interest. If you move the balance to a 0% APR credit card with a 12-month promotional period and a 5% balance transfer fee, your new balance becomes $1,050. Your payment on the new card would be less than $88 per month with only the $50 transfer fee.

Alternative funding options to consider

Personal loans and 0% APR credit cards may not be the best fit for some borrowers. As you explore options, consider these funding alternatives:

• Payday alternative loan: A payday alternative loan (PAL) is a small-dollar personal loan from a federal credit union. You can borrow between $200 and $1,000 with a repayment term of 1 to 6 months, or up to $2,000 for 1 to 12 months, depending on the type of PAL.
• Savings-secured loan: You can use a savings account to secure a loan for low-cost borrowing. Savings-secured loans are relatively easy to qualify for compared to an unsecured loan. The amount you borrow stays in your savings account, but as frozen collateral. As you make payments on the loan, that amount of money becomes available to you again.
• 401(k) loan: Some 401(k) plans allow loans against your policy. Like a savings-secured loan, a 401(k) loan is typically straightforward to qualify for since you borrow against your own funds. But be aware of its potential impact on your long-term goals, such as reduced growth on your retirement savings and potential tax penalties if you leave your job before repaying the loan and can’t pay it back. 
• Home equity-based financing: A home equity loan or home equity line of credit (HELOC) can offer competitive interest rates as you borrow against your home’s equity. But you could lose your home if you default. “Be cautious with any loan that puts your assets, especially your home or retirement, at risk,” warns Xavier Epps, finance expert and owner of FinanceGuyX, LLC. “Just because you can borrow doesn’t mean you should.” 
• Salary advance: Your employer might be willing to give you an advance on your salary to fund an emergency expense, often for little to no interest or fees. The amount you borrow will usually get deducted from your next paycheck, so make sure you have a plan in place for your smaller payday.
• Friends and family loan: Your close friends or family might be willing to help if you have an emergency expense to cover. Just be sure to create an agreement that all parties are comfortable with and hold up your end of the bargain to keep your relationships intact.