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When it comes to borrowing money there are a lot of options for you to choose from. The most common choices people go for are personal loans and credit cards. But depending on your situation, only one of these options might work for you.
A Quick Look At The Differences And Similarities Of Loans And Credit Cards
The reason why these two borrowing types are often seen together is because they have a lot of similarities. Both will offer you money with a specific interest rate added on top. Both will require monthly payments that you need to adhere to otherwise you will be fined. And both require a level of financial literacy to manage your payment expectations.
In terms of differences, personal loans will have a spending cap, and a fixed amount of days to pay off the debt which creates a clear overall cost. Credit cards on the other hand have a fluctuating spending cap, with a flexible payment schedule which creates a hard to predict overall payment plan.
If you don’t use the borrowing method correctly, you can easily get buried in late fees, underpayments, and even bankruptcy.
This shouldn’t scare you away from borrowing though, as picking the right method can reduce the likelihood of money mismanagement.
Common Reasons To Use A Credit Card
There are multiple reasons to use a credit card, but here are a few of the most common. Usually, people use credit cards to increase their credit score, buy casual items that cost more than their normal spending, or gain rewards from their bank.
Increase Your Credit Score
One way to increase your credit score is to prove that you can borrow money and pay it back. Spending just $10 a month on your credit card, and paying off the minimum payment of $5 shows the banking world that you can responsibly borrow money.
Buying Casual Items
Sometimes we need to shop for things that are outside of our normal monthly budget. Clothes, car repairs, and vet bills can easily give your monthly budget a massive hit. To help you get through, you can put these payments on your credit card and pay the bank back monthly instead.
Rewards
Some banks offer rewards if you use their credit cards in certain shops. For example, they might offer a discount from a certain franchise, money back when spending a certain amount, or even the ability to be put into a cash prize.
As long as you use the credit card the minimum amount of times a month, you can be entitled to these benefits.
Common Reasons To Use A Loan
To use a credit card, you are often given a credit limit which you can spend and pay back as many times as you like. As long as you don’t go over the overall limit, it is a constant borrowing system.
For loans, the process is different. You are given the credit limit and can either spend it in one go or split it between different costs. Then you have a certain amount of time to pay every dollar back, with interest.
There is normally just one reason for using a loan, and that’s to pay off a big-spending expense.
If you’re getting married, going on a big holiday, or doing a home renovation, you would need a loan instead of a credit card. Using the loan, you can tell the lender exactly how much you will need, and how much you can afford to pay back every month. This will cover your expenses, and prepare you for a stable repayment process that won’t cripple you every month.
If you put these big expenses on a credit card, you won’t be sure of how long the repayment process will take and you will likely need a bigger spending limit than a normal credit card can offer you. Loans are prepared for big purchases, and so start their credit limits at a high figure.
Take CreditNinja’s personal loans, for example. They will listen to the amount you require and the monthly payments you believe you can afford, and then give you a fixed interest rate as well as a timescale for when the loan will be paid off. Everything will be clearly laid out, so you know exactly what to expect.
Perks Of A Credit Card
Lots of credit cards offer a 0% interest rate for a specific number of months. This means they won’t charge you for the amount of money you are borrowing, instead, they make money from late payments, international transactions, and transferring fees instead.
You can pay the card back at a schedule that fits you. If you get paid weekly instead of monthly, you can pay back little by little instead of one big payment.
The downside comes from the lack of planning. If you find it hard to monitor how much you spend, using a credit card could easily overwhelm you. Small costs add up quickly, and as the debt amount increases as does the interest you need to pay.
Perks Of A Loan
The biggest perk of a loan is its ability to give you clear upfront costs, allowing you to understand the financial commitment you are about to make. However, they often have high-interest rates.
You can easily see how much you own and how much is left to pay both in money and in time. Your loan will tell you how many months are left on the schedule so you can easily understand how long the loan will last.
Summary
Both borrowing types can be amazingly helpful, but knowing which one is best for you depends on what you need to use it for. If you want more flexibility in your everyday spending, then you should consider a credit card. If you want to pay for a large expense like a home renovation, then you need a more stable borrowing option such as a loan.
Both will increase your credit score if you manage them correctly. So the question is if you need something for daily purchases or one big purchase?
