Even though cash is the recommended method of payment in many cases, sometimes we are left with little to no options and, eventually, we turn towards credit cards or loans.
However, it’s essential that we take into account both the advantages and disadvantages of each type of funding and see how they are typically used.
If you haven’t relied on a credit card or loan, you might see little to no difference between the two. But, as with most procedures that involve borrowing money, you have to take into account interest charges, the money you will be able to save with the help of a loan, as well as possible debts.
How Are Credit Cards and Personal Loans Used?
Before covering the benefits of each of these financing options, let’s see what they are used. This information is to be taken into consideration before applying, as you don’t want to get a short-term loan when you would’ve needed a longer one.
- Loans – this option is fit for more significant amounts of money which, require a longer period of repayment. Given the more extended period, you will have smaller monthly payments to make. While these are easier to predict, they might also come with significant interest costs, mainly because it can take years for you to repay your debt.
- Credit Cards – this option is usually the best when it comes to short-term debt – namely, debt that you can pay off in a single year. Moreover, with a credit card, you have the option to pay off your balance in the grace period – 30 days – to avoid interest costs altogether.
However, the loan vs. credit card battle is not fought in terms of general use. Obviously, there’s more to find about the two in their details. You will have to go over the specifics of each option and evaluate it before applying for it – worry not, as we are about to do just that!
Let’s see how credit cards and loans compare to one another!
Credit Cards – Specifications
Credit cards require no collateral – they are unsecured loans. Still, they come with a line of credit, also known as a pool of money available to you, that you can spend as you wish.
The money is considered borrowed when you make a purchase. You can repay and borrow as much as you want – however, you do have to always stay below your credit limit.
Let’s see the most important things that have to be taken into consideration when it comes to credit cards.
- They are not ideal for cash – compared to loans, credit cards don’t usually come with the availability of money. You can, however, request a cash advance from your credit card holder, but this will require you to pay a fee when withdrawing the said cash. Moreover, a cash balance will usually come with a higher interest rate than the usual credit card purchases.
- Ideal spending tools – reportedly, credit cards are a good fit for purchases from merchants. This is because you will benefit from buyer protection features when paying with a credit card. Also, the card issuer will usually not charge you any fees when paying for services or goods.
- The possibility of toxic rates – it is well-known that credit cards can charge extremely high-interest rates. If your credit isn’t great, you can end up paying over 20% APR – in this case, the credit card APR vs. loan APR battle is usually won by loans. Keep in mind that the interest rates can change when using credit cards, as these are variable. On the other hand, loans usually come with predictable fixed rates.
Loans – Specifications
When it comes to loans, these basically provide you with a lump sum of cash, which is usually sent directly to your bank account. Obviously, you can do whatever you want with the funds after you receive them.
But what about the specifications?
- One-time, lump-sum loans – after applying for a loan, you will receive its entire amount at once. In most cases, you are unable to borrow more money after doing so – some lines of credit allow additional borrowing. The main advantage here is that, given the lump sum that cannot be increased, you are not able to overspend if you feel tempted to buy something, whereas credit cards won’t come with such warning.
- Repayment term – the monthly payments required to pay off the loan are usually fixed. In short, you have to pay the same amount of money every single month until your debt is paid off. Naturally, the interest cost is integrated into each payment.
Credit Card vs. Personal Loan
Now that we’ve covered the specifications of both credit cards and loans, it’s time to see how they compare with each other in terms of two essential aspects – namely the credit building and the repayment time.
- Credit Building
You can build credit via both types of loans. Therefore, you won’t have to rule one out because you are worried about your credit and, ultimately, only the specifications mentioned above should be taken into account when making a decision.
However, you have to keep in mind that, while personal loans are considered installment debt, credit cards are seen as revolving debt.
You can’t rule the better one out between the two when it comes to credit score. The most important thing to remember is that you make use of debt wisely.
Reportedly, it is better to have different types of debts – both installment and revolving – as this can help you increase your credit score.
- Repayment Time
As you may know, credit cards and the debt they inflict can stick around for quite some time and become very uncomfortable, especially if you decide to make only minimum payments.
On the other hand, personal loans come with certainty – you will always know exactly when you’ll be free of debt. All you have to do is make every payment that’s required; doing so will result in your paying off your loan at the end of its term.
The Bottom Line – Which is Better?
Obviously, you have to figure out which type of debt is best for you before you make a choice between a credit card or a loan. You will have to round up the details of the loans that are available to you, and then figure which advantages are fit for you and which disadvantages may become a nuisance.
Before choosing a loan, you must know as much as you can about its annual fees, interest rates, and origination fees. In the end, calculating the total cost of borrowing will let you know which type of loan is best for you!