We are all consumers. While that is a redundant statement, there’s a reason why we mention it. Since we are consumers, we are constantly using new products and services on almost a daily basis. This means that sometimes, we may not have money to support our needs. For example, there are people who buy a home for themselves before they turn 30. Then there are those who are able to buy their own house when they reach 50. In essence, financial planning is a big part of your life. However, knowing which tools to use in managing finances can mean all the difference. Two big financial tools in use today are loans and credit cards. So, let’s compare them to see which one is better to use in which condition. Here goes the Loan Vs Credit Card comparison:
Loan vs Credit Card
When comparing a loan with a credit card, the first issue is of availability. While it depends mostly on your credit score, it is easier to get a credit card than a loan. After all, you will not need a personal loan for Rs 50,000. When such a scenario arises, you will always look for a credit card. Not only is getting a credit card easier but your chances of getting the desired credit limit are high. However, for a loan, there is long verification process which follows some paperwork. So, in terms of availability, the Loan vs Credit Card battle swings in favour of credit card.
When it comes to finance limit, a loan any day trumps a credit card. You can get a loan in lakhs of rupees or even crores. A credit card cannot afford you more money than a loan can, even if your limit is in few lakhs. A simple reason behind that is this – a credit card is an instrument for a short-term, unsecured loan. That short-term bit is a limitation that is not in the case of a regular loan. Barring a personal loan, every other type of loan is a secured one. Unless the bank can recover it from you, it will not even forward it to you. So, Loan vs Credit card comparison stands tied for now.
A good thing about a credit card is that it offers you a short-term advance. However, in case you default on a payment, the high interest rates will make you cry. So, now you have to not just make your payment but also pay the climbing interest amount. In comparison, a loan makes you pay the interest amount first and then the principal amount. Yes, the interest rate will still be high. However, loan rates do not change as much as those of credit cards. In case of a credit card advance, a default means interest on unpaid bill. How? The interest is charged on the bill amount on a daily basis. The real trick is that one day one, interest will be charged on the bill. On day two, the interest will be charged on the previous day’s amount (principal+interest amount on day one). The cycle will continue until you pay the bill and the interest. So, going by the way in which your loan amount is affected by the interest rate, the loan wins this round.
Loan vs Credit Card – Conclusion
When you compare the two instruments, you will observe a common thing. In most cases, a bank is ready to offer you either. However, before that happens, a representative always asks you of your spending range. The big difference between the two instruments is their usage frequency. You cannot opt for one loan after another if you do not have a big load of money with you. However, you can use a credit card as frequently as you wish until your credit limit goes poof. Pay the bill and you are ready to spend the credit limit again. So, it is all about your use. If you need to buy things like a house or a car, you have no option. You have to go for a loan. However, for buying two phones of Rs 50,000 each, for instance, you don’t need a personal loan. A credit card swipe will do. So, identify your needs and then opt for the appropriate instrument.