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Credit cards or personal loans: Which is better for holiday spending?

Cards can help you earn rewards and avoid interest charges, but a personal loan can offer a fixed payoff plan at a low APR


Personal loans and credit cards require you to borrow money that must be paid back, but the way they’re set up and the perks they offer work better for some than for others. Read on to find out which is better for your holiday spending plans.

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In a perfect world, you would have started saving for the holidays early in the year, stashing away a set monthly amount.

At this point, you would have more than enough money to check off everyone on your gift list, and perhaps even some leftover cash to spend on Black Friday deals for yourself.

But life happens, and other bills never seem to stop rolling in. For that reason and plenty of others, it’s not uncommon for consumers to borrow the money they need for the holidays, either with a credit card or a personal loan.

But, which is better? That depends on your goals and who you ask. Both personal loans and credit cards require you to borrow money that must be paid back, but the way they’re set up and the perks they offer work better for some than for others.

See related:  Holiday shopping and credit card guide 2019

When it makes sense to use a personal loan

Personal loans have become all the rage these days, mostly due to obsessive marketing efforts from the online lenders and banks who offer them.

Still, these loans can be better than other options if you need to borrow money. Not only do personal loans come with fixed interest rates and fixed repayment periods, but they come with a fixed monthly payment that will never change.

That makes the payment on a personal loan a lot easier to budget for than the fluctuating payments you find with credit cards, but that’s not the only benefit of these loans. According to financial coach Steven Donovan, the fact that money is more about psychology than your financial knowledge can work in your favor. That’s because you get personal loan funds in a lump sum, and you can’t keep using it over and over to borrow more like you can with plastic.

“A personal loan will limit the consumer’s chances of getting into more debt since the personal loan is not a revolving loan like a credit card,” he says.

College professor and financial planner Brandon Renfro says another benefit of personal loans is the fixed repayment term that helps consumers know exactly when they’ll be debt-free.

“That means you are at least held to a repayment schedule that you can’t drag out indefinitely the way you might be able to with a credit card,” he says. “That’s good because your goal and plan should be to pay that off in a reasonable amount of time.”

The fixed monthly payment can also be a boon, since you don’t have the option to just pay less if you want, he says.

“With a credit card you could cut back to paying only the minimum. That could help you in a pinch, but you’d want to get back to a point where you could pay more than the minimum quickly.”

A final benefit of personal loans over credit cards is that, if you have good credit, you can typically qualify for a much lower interest rate. Where the average APR for credit cards is currently over 17 percent, you can frequently find personal loans with APRs as low as 5.99 percent.

For the most part, experts agree that personal loans are best for people who may need more time to pay down their balances. You’ll get a low fixed rate that can last for several years, and the security of a fixed monthly payment that will never change.

That’s good if you really need to borrow money in the first place, but you may also not be doing yourself any favors if you’re borrowing more than you need or using the funds for a luxury splurge.

See related: Will personal loans eclipse Americans’ credit card use?

Why you may want to consider a credit card

While credit cards come with higher variable APRs, they offer more flexibility and a handful of benefits that can make them a good deal. For starters, credit cards let you borrow only what you need, meaning they don’t require that you commit to borrowing a lump sum.

According to author and financial attorney Leslie Tayne, this is why credit cards are often the better choice when you need to make smaller purchases (like holiday gifts) and pay them off relatively quickly. When you have the opportunity to charge purchases as you go, you may wind up borrowing less.

Many consumers also use their credit cards for their everyday purchases to earn rewards. This strategy can leave you ahead each month if you consistently pay off your balance in full. Some credit cards even offer big sign-up bonuses if you can spend $500 or more within three months, which may be easier to do when you have holiday purchases to buy.

“This can be a good system if you’re making a consistent habit of paying your balance off completely,” she says.

Tayne noted that credit cards can also come with additional security like extended warranties and purchase protection, which can make sense for holiday purchases.

Some cards offer lower initial rates that can make applying for a card worth it when compared to the rate you might get on a personal loan, says Renfro. He’s talking about cards that offer a 0 percent APR for anywhere from 12 to 18 months on purchases or balance transfers.

With a card that gives you 0 percent APR on purchases for a year or more, you could potentially borrow the money you need for the holidays and pay it off interest-free before your introductory offer is up.

Just remember that, like all good things, 0 percent APR offers come to an end. If you don’t pay your balances off before your introductory offer is up, you’ll watch as your interest rate resets to a much higher variable interest rate.

And either way, it’s important to beware of the pitfalls of using credit, the biggest of which is the potential to rack up debt you can’t just pay off. It’s tempting to spend with credit when you won’t get the bill for several weeks, but carrying a balance can leave you paying a high APR with very little in rewards to show for it.

See related: Holiday shopping: How to earn more cash back at department stores

Pitfalls of borrowing to watch out for

Using a credit card or a personal loan for holiday shopping doesn’t have to spell disaster, but it easily can wind up that way if you borrow carelessly and without a plan.

Your best bet is thinking long and hard about how much you want to borrow, how much time you need to pay it off and the monthly payment you can afford before you pull the trigger on any loan. Then, and only then, can you borrow money with minimal risk of your new debt inflicting harm on your other financial goals.

But borrowing still has its problems, even if you do have a plan. Pitfalls to watch out for can include letting banks drive your purchasing decisions, and that’s especially true if you are prone to listening to their marketing spiels.

“Banks are in the business of making money,” says Donovan. That’s why you should always sit down and do your own research, look at your spending plan and make the decision that fits your income.

Also, be sure you wind up with a monthly payment that doesn’t stretch your finances too far. In other words, leave plenty of wiggle room in your budget even after accounting for repayment of your new debt.

“You may be confident in your ability to pay off your personal loan within the loan term now, but unexpected financial circumstances could change your situation, which could lead to trouble paying off your debt,” says Tayne.

Additionally, be sure you’re not letting a holiday loan turn into a situation where you’re constantly borrowing more and more to keep up a lifestyle you can’t afford, says Renfro. When you borrow money, you soften the blow a little in terms of what you immediately feel in your pocketbook, he says.

“This makes it easier to borrow again, and the debt can start to add up,” Renfro says. “Once your debt runs away from you it’s really hard, both psychologically and financially, to get out from under it.”

Finally, don’t forget that money lost to interest payments is basically set on fire. You’ll get nothing in return for the cash you pay toward interest and fees when you take out a loan or use a credit card, yet you stand to lose a lot.

Only you can decide if borrowing is worth it, whether you need a loan for the holiday season, home repairs or a luxury vacation to the Maldives. Just remember that debt doesn’t go away on its own. Once you invite debt into your life, you’re stuck dealing with it until you eventually pay it off.

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The editorial content on this page is based solely on the objective assessment of our writers and is not driven by advertising dollars. It has not been provided or commissioned by the credit card issuers. However, we may receive compensation when you click on links to products from our partners.

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