Financing guide

Personal loan versus credit card for debt

A personal loan almost always clears existing card debt at a lower rate than the cards charge, and it converts revolving balances into a fixed instalment that cannot be redrawn. A credit card stays flexible and keeps the balance revolving, which is why it costs more the longer it stands. The exception is a genuine 0% balance transfer cleared inside the promotional window. The lowest rates are only available to the most qualified applicants.

Why the card costs more over time

A credit card prices on a revolving balance, so interest accrues every month on whatever remains. The minimum payment is set low enough to keep the account open for years, which means a balance can survive a decade of steady payments. The rate is also usually variable, so it moves with the market.

A personal loan prices on a fixed schedule. The instalment covers interest and principal together, so the balance falls every month and reaches zero on a known date. The rate is normally fixed for the term, which makes the total cost knowable at signing.

The one case where a card wins

A balance transfer to a card with a 0% promotional rate can beat any loan, but only if the entire balance is cleared before the window closes. If any balance remains, the rate reverts and is typically higher than a loan rate, and some offers charge interest retroactively from the transfer date.

Treat the promotional window as a deadline, not a hope. Divide the balance by the number of months in the window and check that the resulting payment fits your budget. If it does not, the loan is the honest choice.

What a personal loan does to your credit file

A new loan application normally triggers a hard inquiry, which can shave a few points. Against that, consolidating several card balances into one instalment lowers your credit utilisation, and utilisation carries more weight than an inquiry in most scoring models.

The failure mode is re-borrowing. Paying off the cards frees their limits, and the freed credit gets used again, leaving you with the original debt plus the loan. Close the cleared accounts or cut the limits if that risk is real for you.

The numbers to compare

For each card, record the balance, the annual rate and the current minimum payment. Total the interest you would pay clearing every card at its current payment. Then run the loan offer over the same number of months and compare the interest totals.

The comparison only works on equal terms. A loan that lowers the payment by stretching the term can cost more than the cards, so set both calculations to the same payoff horizon before drawing any conclusion.

Compare total interest over an identical number of months.
Check whether the loan rate is fixed or variable.
Ask whether an origination fee is deducted from the amount you receive.
If you transfer to a card, note the exact date the promotional rate ends.

Reading the two disclosures

In the United States, a personal loan carries a Truth in Lending disclosure that states the amount financed, the finance charge in dollars, the annual percentage rate and the total of payments. A card statement carries a Schumer box with the purchase and balance transfer rates and the fees.

In Canada, federally regulated lenders must disclose the cost of borrowing and the annual percentage rate. Put the two documents side by side and compare the same four numbers, not the marketing lines.

When to keep the card instead

Keep the card when the balance is small enough to clear within a couple of months, because no loan can beat a balance that never sees an interest charge. Keep it when you have no fixed income and a fixed instalment would strain the budget more than a variable minimum.

Take the loan when the balance is large, the rate gap is wide, and the term is short enough that total interest falls. The decision is arithmetic, not loyalty to either product.

A checklist before you sign

Confirm the amount you receive after any fee, the annual rate and whether it is fixed, the term in months, the monthly payment, the total repayable, and the prepayment terms. If one of those is missing, the offer cannot yet be compared with the others on your list.

Then check the card side once more. A lower loan rate over a long term can still lose to a card cleared aggressively. Run both on the debt payoff calculator and let the totals decide.

What the total cost looks like on paper

Take a $6,000 balance. A card at 22% paid at 2% of the balance each month can take well over a decade to clear and cost thousands in interest. A three-year loan at 12% costs a fraction of that, even though the monthly instalment is higher. The instalment is the point: it is large enough to retire the balance.

Run both schedules on the debt payoff calculator. The card schedule curves, because the minimum falls as the balance falls. The loan schedule is a straight line to zero. The shape of the two lines is the clearest argument for the loan.

What happens if your income drops

A loan instalment is fixed, so a lost income turns it into a bill you must still meet in full. A card minimum falls with the balance, which gives a little more room in a bad month. That flexibility is the card's one real advantage, and it is worth naming.

The way to keep both is to take the loan and hold an emergency buffer equal to at least one instalment. A fixed payment plus a buffer is more resilient than a revolving balance that quietly grows when times are hard.

The tax and legal points nobody mentions

Interest on personal credit is generally not deductible in either country. Card interest and loan interest sit in the same category for a household borrower, so there is no tax reason to prefer one over the other. That removes a factor people often assume exists.

If a balance has already been sold to a collections agency, the arithmetic changes and the first call is to a non-profit credit counsellor, not a lender. A new loan cannot repair a defaulted account, and it can add a fresh obligation on top of an old one.