Should I Choose a Credit Card or a Payday Loan?
Huge discounts during the mega sales, scheduled home repairs or long-distance travel may require extra money. Borrowing securely means using one of the most popular financial instruments – a payday loan or a cash advance credit card. Each of these products has its unique features, benefits and downsides. What should you choose: a credit card or a payday loan?
Table of Contents:
- What is a credit card?
- What is a payday loan?
- Payday loans vs credit cards: what to choose
- What else do you need to know about payday loans?
- What else do you need to know about credit cards?
- Can I take out a payday loan and a credit card at the same time?
- The importance of financial discipline when borrowing money
What is a credit card?
A credit card is a more “free” type of loan. With this instrument, you can use the money of the bank at your discretion. The number and amount of purchases depend on the credit limit, which the bank sets individually for each person.
An indisputable advantage of a credit card cash advance is that a loan can be interest-free. After all, every credit card has a so-called grace period. It usually lasts from 30 to 90 days. If you have time to pay off the debt within this period, then you will not have to pay for the use of credit money. The credit limit can be used an unlimited number of times – more precisely, as long as the card is active. And at the end of the validity period, it can be reissued and used further.
A credit card is a quick access to borrowed money. It can help out in an unforeseen situation, for example, during a trip abroad. It is unlikely that you will be able to get a loan abroad, but using a credit card for payments is quite possible.
But this product also has its own features. The bank can unilaterally reduce the credit limit on the card or deprive you of it altogether. This rarely happens, but it cannot be ruled out. First of all, those who violated payment discipline may lose access to credit money. However, sometimes this can also be caused by third-party factors.
It is also worth noting that it makes sense to use a credit card to pay for purchases on the Internet or in a store where there is a payment terminal. If you need cash, then a credit card is not the best choice. Withdrawing cash from it against the credit limit is an expensive pleasure.
Pros and cons of credit cards
The main advantages of using a credit card include:
- Lower interest rates (on average 2.5% to 3.5% per month). Regular customers who have managed to confirm their reliability may be offered lower interest rates.
- Grace period. In you repay your credit card debt on time, you can use it without interest. In this case, a small fee will only be charged for servicing the card and sending SMS notifications.
- Revolving credit. It lets you borrow money up to a maximum credit limit, pay it back over time and borrow again as needed.
- Larger credit limit than the loan amount. Often, the limit on a credit card is twice the borrower’s income and can be increased by the bank in case of frequent use of a credit card.
- Bonuses or cashback. They can be spent on any purchases or withdrawn to the account.
Another indisputable advantage of a credit card is that you can use it easily abroad. It can be used to pay in any currency through automatic money exchange. Some banks have established a system for issuing credit cards with a limit in foreign currency. As for payday loans, they are issued only in the national currency – US dollars.
- Credit limit. The credit limit on the card rarely exceeds $10,000 (exceptions are privileged cards for VIP clients).
- Hidden costs. Credit cards have a number of hidden charges that could make it expensive. These are late payment fees, joining fees, renewal fees and processing fees, etc.
- Good credit required. Most credit cards require a very good credit score of 700 or higher. Only a few banks offer credit cards for bad credit.
- Easy to overuse. With revolving credit, it might be tempting to make all your purchases with your card. Thus, you can lose control of how much you owe.
- Credit card fraud. There are chances you might be victim of credit card fraud. Some fraudsters may clone a card and gain access to your confidential information. Learn how to avoid credit card fraud.
What is a payday loan?
Many consumers consider payday loans to be a lifesaver that save people who need fast cash before they receive their next paychecks.
A payday loan is small-dollar and short-term. They are issued by microfinance institutions. They must have a license to operate in a particular state. Payday loans have the following basic features: a small amount, speed of processing, a simple application procedure, relaxed eligibility criteria. You can even apply online. These qualities distinguish payday loans from traditional personal loans.
When applying for a payday loan, you do not even need to leave your home. All you need is access to the Internet: you submit an online application, wait for approval and receive the funds within 24 hours (often in 1 hour). Income proof certificates or collateral are not needed.
You can submit an application online around the clock. As for banks, it will take several days or even weeks to issue a credit card.
Initially, payday loans were created for the needs of small businesses. Entrepreneurs needed quick money for a short period of time, and bank loans were not issued quickly. But the service has become popular among ordinary consumers because it is easy to receive money.
Keep in mind that payday loans have a high interest rate – many state laws set a maximum amount for payday loan fees ranging from $10 to $30 for every $100 borrowed. Lenders understand that most borrowers looking for bad credit loans. Instead, lenders make up for the increased credit risk by charging higher interest rates and additional fees.
Pros and cons of payday loans
- Easy to get. You typically need a few basic documents to apply and receive money from a microfinance institution.
- High approval rates. All categories of people can get it – retired, housewives, self-employed people, disabled people, students and even people with bad credit (while bad credit credit cards are not easy to get). There are even loans for unemployed.
- Fast process. Usually, the lender makes a lending decision within a few minutes (in isolated cases, the process can take up to one business day).
- Online application. All that is required is to go to the website of the microfinance company or use a lender matching online portal. To get a credit card, you should visit a bank branch, which may be located remotely or closed in the evening.
- Convenient repayment options. The most common way to repay a payday loan is via your bank debit card. When you borrow the money, you agree to let the lender take the money from your bank account on the due date.
- Money for whatever needs. You can spend the borrowed funds on literally anything: car repairs, medical treatment, home improvement, business expenses, vacation, holidays, etc.
- Short terms. Such loans are usually issued for up to 30 days. In some cases it can reach 4 months, it all depends on the lender’s policies.
- Small amounts. As a rule, you can borrow no more than $1,000. Some lenders offer to borrow up to $2,500.
Payday loans vs credit cards: what to choose
The decision on which option to use should be made individually, depending on the specific circumstances.
Applying for a credit card takes much longer. It can take up to several days or even weeks to verify the authenticity of documents and credit history.
Microfinance institutions provide payday loans for bad credit almost instantly. All operations can be performed without leaving home. All you need is a computer or smartphone with internet access. On the other hand, the interest rate in this case is significantly higher than the rate for using the bank’s borrowed funds.
Therefore, it would be reasonable to resort to payday loans if you need a relatively small amount for a short period of time in an emergency. Otherwise, the overpayment will be very significant. You should also keep in mind that that microfinance institutions usually charge high penalties for late or missed payments.
If you need money regularly to pay for purchases and to meet everyday needs, you’d better apply for a credit card. It will allow you to save on interest and also receive cashback, bonuses and discounts from partner stores of the bank. When paying with a credit card, it is important to use this product wisely and repay debts on time without going beyond the grace period.
Below is a table that demonstrates the key differences between a payday loan and a credit card:
|Payday Loan||Credit Card|
|For smaller amounts||Offers ongoing access to specified amount|
|Does not consider the ability to repay||Variable minimum monthly payments|
|Higher interest rates and fees||Lower interest rates|
|Repay with next paycheck||Can help build credit better|
|Not always reported to credit bureaus||Used for shopping and everyday expenses|
|Shorter repayment terms||Unsecured loans not backed by collateral, secured loans are backed by collateral|
What else do you need to know about payday loans?
- Getting a payday loan is fast, easy and convenient – you just need to fill out an application on the lender’s website or using a lender matching service. Learn how to choose the right lender.
- If approved, the money will be credited to your bank account within a few hours.
- Payday loan amounts in Nebraska typically range from $100 to $1,000.
- The available amount depends on your monthly income, current loan obligations and credit history.
- You can apply for a payday loan online, which will take from one to two minutes.
- It is important to understand that borrowing from a microfinance institution is more of a forced measure than a common practice. Such a loan can be taken only in exceptional cases, for up to 31 days and with confidence that you will repay the debt on time.
- Before contacting a lender, read these 12 tips for first-time payday loan users.
What else do you need to know about credit cards?
- A credit card balance transfer typically takes about five to seven days, depending on the card issuer.
- You can also deposit and use your own funds on a credit card account, which can be beneficial for purchase insurance.
- Loan interest is calculated only for the used credit limit. Credit card purchases are subject to an interest-free period. A grace period is usually between 25 and 55 days.
- In the case of a credit card cash advance, the available limits in Nebraska usually range from $300 to $10,000.
- There are various types of credit cards – unsecured credit card, secured credit card, balance transfer credit card, travel rewards credit card, gas rewards credit card, cash back rewards credit card, student credit card, 0% intro APR credit card, etc.
Can I take out a payday loan and a credit card at the same time?
In general, no one forbids using these two financial products at once: a payday loan for emergency cash expenses and a credit card for large purchases on a regular basis.
Remember that any loan requires financial discipline. And it does not matter whether you took a payday loan or a credit card cash advance.
The main thing is to carefully read the terms of the contract, study all the nuances of the obligations assumed and remember that money is not a goal, but a tool. You just need to know how to manage your money correctly.
The importance of financial discipline when borrowing money
We repeat that a payday loan is used for small emergency expenses. It allows you to receive the necessary cash immediately and repay the debt in one lump sump within one month. And here, again, you need to calculate your strength and try to borrow as little as possible so as not to pay too much interest. That is, borrow exactly as much as you need at the moment.
With a credit card, the story is reversed: the larger the credit limit, the more convenient. However, even here you need to clearly correlate your desires with financial capabilities. Always keep in mind the likelihood of force majeure and do not forget about interest in case of late payment. The terms of a credit card are extremely attractive for those who have the opportunity to replenish their budget quickly and repay their debts promptly.
Before borrowing money, consider alternative ways to make money quickly.