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Personal Loans Versus Zero Balance Credit Cards – What’s a Better Deal?

Both personal loans and zero balance credit cards have plenty of upsides for financial consumers who need access to credit quickly. But what financial access tool is better?

“The main difference between a personal loan and a new “zero balance” credit card is the way in which you are able to utilize these funds as a consumer,” says Adem Selita, founder of the Debt Relief Company, in New York, N.Y. “A personal loan has the most flexibility in terms of what you can use the line of credit for—since the loan is being directly deposited into your bank account—you can literally use the funding for whatever you want.”

“A new credit card on the hand does have its limitations on how you can use the credit,” he adds.

As Selita notes, the best answer is the financial tool that meets your unique money management needs. That said, there are general upsides – and downside risks – to both a personal loan and a zero balance credit card.

Here’s what the financial experts think, in statements to

Adem Selita, founder at the Debt Relief Company, New York, N.Y. Comparing the two options compare really depends on your personal needs and uses for the line of credit.

A personal loan may be better suited for an individual that needs the flexibility in how they will be using the credit. On the other hand, if you have a set category or area of purchase you will be using the credit for, credit cards may be able to offer rewards points on what applicable areas you end up spending on.

If you are a consumer that is looking to consolidate debt in order to satisfy other debt obligations, the best option for you will typically depend on your “discipline” and the time you need in order to repay the debt back.

If you qualify for a 0% interest rate credit card and suspect you will easily be able to repay the balance by the end of the promotion (typically 12-18 months), this is definitely the best option. Keep in mind that if you’re using a 0% interest balance transfer option, most balance transfers charge an upfront 4% transfer fee (essentially turning the 0% option into a 4% interest option). This method will have you pay the least interest, however it will definitely require discipline on your end, as you will need to fully repay your debt obligation within the promotional period.

A personal loan on the other hand is better suited to an individual that needs more time to repay the debt.

A personal loan will cost more in fees and interest than making use of a no interest balance transfer option (there are also associated origination fees and could be other smaller fees including at the time of approval) but this also means that you have a set payment each month and set amortization period. Having a set amount each month and payback period can be very comforting for many consumers.

Depending on the credit card option you qualify for, personal loans will typically cost more in interest than a 0% interest balance transfer option (but less interest than a standard APR credit card).

The better option for people carrying debt will typically be the balance transfer option. If you’re highly disciplined and truly believe that you can finish repayment within the promotional period you should definitely opt for the balance transfer route.

RELATED: Personal Loan APR vs Interest Rate: Why You Need to Know the Difference

Todd Christensen, author of the book “Everyday Money for Everyday People” and an education manager at Money Fit by DRS, in Boise, Id. Let’s rate personal loans and 0% credit cards on a benefits basis.

Speed of Repayment

Winner: Personal Loan. Roughly one in three consumers will begin carrying a balance on the credit card, leading to indefinite debt. The personal loan requires a monthly payment that ensures eventual full repayment.

Overall Cost

Winner: Personal Loan. Although the personal loan will collect interest charges on rates from 5% to 10%, consumers overspend by 12% to 15% on everyday purchases using a credit card.


Winner: 0% Credit card. Obviously, credit cards offer the greatest amount of flexibility when deciding how and when to use it.

Judges’ Split Decision

Winner: Personal Loan

RELATED: Can’t Qualify for a Personal Loan?

Sean Messier, editor at Credit Card Insider, in Syracuse, N.Y. Unsecured loans (the underlying model for personal loans) and credit cards are both useful tools for paying off larger purchases over time, but it’s crucial to do your research before you choose which is best for your situation.

Comparing loans and credit cards on an even playing field, a zero-balance credit card is the better bet, but only if you use a card with a 0% purchase APR offer. Certain credit cards feature promotional offers that allow you to carry a balance for a year or more without accumulating any interest whatsoever.

Unsecured loans, on the other hand, will virtually always include fees and interest. Consequently, apply for a card with a 0% purchase APR, and you’ll likely end up saving hundreds or thousands of dollars on interest over time, as long as you pay off the purchase in full before the promotional period ends.

Keep in mind that some credit cards, including certain retail cards, offer deferred interest rather than straight-up 0% APR offers. A deferred interest offer means that if you have even a penny of the initial balance left on the card when the 0% APR period expires, you’ll be charged interest on the full initial purchase.

If you don’t think you’ll be able to qualify for a 0% APR credit card, or you’re not sure whether a credit card will cover the full purchase amount, then an unsecured loan is still a good choice. That’s because basic personal loans are generally solid financial products, as long as you’re financially equipped to make each payment in full.

RELATED: Personal Loans vs. Credit Cards: What’s the Difference?

Deciding between a personal loan and a balance transfer credit card

The decision should be based on the amount of debt you have, your ability to make payments, and your credit score.

If you don’t have great credit, a personal loan may be your only option. If you can choose between both, calculate the total cost of a personal loan, including the origination fee, and consider your confidence in your ability to make monthly payments for the duration of the loan term.

For a balance transfer card, consider whether you would be able to pay off your entire balance before the end of the introductory period.
The decision is truly specific to your personal situation and should be what makes the most sense for you and your finances.

RELATED: Looking for a Personal Loan? How Creditors Check Beyond Credit Scores

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Brian O'Connell
Brian O’Connell

Brian O'Connell has been a finance writer at TheStreet, TheBalance, LendingTree, CBS, CNBC, WSJ, US News and others, where he shares his expertise in personal finance, credit and debt. A published author and former trader, his byline has appeared in dozens of top-tier national publications.

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2020-09-25T15:50:30-07:00September 14th, 2020|Personal Loans|
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