Credit Cards vs Personal Loans – Best Major Expense
Before deciding what is best to take, personal loan or credit card, you should understand the specifics of these products. They have similarities and differences. The common thing for a loan and a credit card is that in both cases money is borrowed from the bank for a certain period of time at interest. There are tariffs, contractual terms and penalties if they are not met. This is where the similarities end and the differences begin.
First of all, a regular personal loan differs from a credit card in the form of issuing borrowed funds. The first option involves the issuance of a certain amount of cash on hand or crediting to the client’s bank account. You can withdraw money without any commission. This option is most relevant for those who prefer to pay in bills and do not trust non-cash payments.
Unlike a persnal loan, a credit card is aimed specifically at non-cash transactions. In principle, it is also possible to withdraw cash, but this is unprofitable due to high commissions and the loss of the opportunity to use the “grace period” (a grace period in which interest is not charged).
Another important point that distinguishes a credit card from a cash loan is the principle of calculating interest and determining the debt amount. When applying for a personal loan, interest for usage of the borrowed money is charged immediately, starting from the date of signing the agreement. In turn, the owner of the credit card does not become a debtor to the bank until he starts spending money. In addition, if the funds were spent and returned to the account during the grace period, no interest will be charged.
There is also a difference between a personal loan and a credit card in terms of renewing the limit. In the case of cash loans, each time you have to submit a new application to the bank for a loan. The cards are rechargeable, until the end of their validity period, the limit can be renewed repeatedly without unnecessary formalities, provided that there are no outstanding debts.
Pros and cons of personal loans
Considering a credit card and a loan separately, each option has its own individual advantages and disadvantages. The main advantage of the best personal loans is the ability to immediately get a large enough amount that can solve many financial problems. Also, among the advantages, the following points can be noted:
- the loan is issued in full immediately upon signing the agreement;
- the borrower gets access to promotions that allow him to purchase goods and services at a great discount;
- to get a consumer loan, in most cases it is enough to provide a minimum set of documents;
- high competition between banks contributes to the systematic revision of the terms for issuing loans in favor of the client;
- a client may also take a personal loans to pay off credit cards.
The main disadvantages of personal loans include:
- the presence of an interest rate, which ultimately leads to an overpayment;
- problems with taking out a loan by persons without official registration for work or receiving an illegal salary;
- the presence of severe penalties for late payments, as well as in cases of impossibility of full debt repayment;
- long-term payments, which can lead to debt dependence if the borrower’s solvency decreases over time;
- age and other restrictions that prevent lending to certain groups of citizens.
Advantages and disadvantages of credit cards
Like regular loans, credit cards are not perfect financial products. It has both pros and cons. The benefits include:
- the possibility of multiple use of the credit limit;
- availability of a grace period during which borrowed funds can be used free of charge;
- instant payment for any purchases in various ways (via terminals, mobile applications, on the Internet);
- the presence of a cashback, by which you can return a part of the spent funds to the card;
- saving money due to additional discounts from the bank’s partners.
Credit cards have many advantages, but there are also disadvantages:
- rather high interest rates reduce the product profitability;
- paid annual service entails extra costs;
- a commission is charged for withdrawing cash from a credit card;
- there is a risk of getting used to the use of borrowed funds, as a result of which debt obligations can greatly exceed the financial capabilities of the cardholder.
What option is easier to get?
In terms of affordability, a credit card has no significant advantages over a cash loan. To get it, you also need to meet certain criteria. So, the applicant must be over 18 (21 in some states), have the US citizenship, an official job and a proven income. The last indicator directly affects the size of the limit for both consumer loans and credit cards.
As for the speed of application, it depends on the specific bank. Some institutions can issue a loan within one day, while the preparation of the card in any case will take several days, although the account itself is opened almost instantly. You can make a request for a loan or credit card in any way: through a visit to the office or online. Today each bank has its own official website.
Summing up, it can be said that there is no definite answer to the question of which is better – a loan or a credit card. You should choose the product that best suits your specific goals and objectives. When assessing a particular offer for benefits, it is worth weighing the pros and cons, and also adequately determine your own financial capabilities in order to avoid debt dependence on the creditor bank.
Tags: credit card, finance, personal loan