How to Select Between a Credit Card and a Loan

| Posted: 15-01-2008 | Comments: 0 | Views: 6 | Rating: (50)

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Life is comprised of choices and while some are serious others may be somewhat whimsical. In some cases, choices can be difficult due to a certain level of confusion that can derive from a lack of understanding of the choices. Consider the dilemma of choosing between a credit card and a loan. Both are advances of money with the understanding that the borrowed money will be paid back. However, these are certainly not the same entity as there are significant differences between the two.

In order to understand the differences between the two a clear distinction of the differences between the two must be understood. A credit card is essentially a means of accessing a loan in small sums upon demand. In other words, if the credit limit is $5,000 and the consumer makes a purchase with the card of $100, you have initiated a "loan" of $100. You have not accessed the remaining $4,900. A loan is a lump sum payment that is provided upon approval. So, if you are approved for a $5,000 loan you must immediately start payments on the entire $5,000 based on a fixed monthly amount. With a credit card, the monthly payment amount will fluctuate based upon the amount of money that is owed on the credit card.

Second, when it comes to selecting between a credit card and a loan one must first define what the loan is intended to purchase. If one wishes to have a credit available that can be accessed easily, then a credit card would be the wise to acquire. Now, there are also, however, "line of credit" loans that many banks offer and these can be accessed with debit cards that can be accepted where Visa or Mastercards are accepted. In such an instance, which one would be better than the other? The answer here can be somewhat complex as there are major differences between the two. If one is looking for the lowest interest rate possible then the line of credit debit card would probably be the smart move. However, there are a number of positives that a credit card can provide such as bonuses and rewards; purchase protection; 24 hour customer service lines; and other fringe benefits that major credit card companies offer. A line of credit does not possess any of these benefits and that is the tradeoff for the lower interest.

Additionally, if one is looking to take the loan out for a single purchase such as new furniture, an entertainment system, etc then a loan may be the right option because the interest rates on such a loan would be generally lower than what the credit card offers. However, if the retail store is offering such benefits as "90 days same as cash" (that is, there will be no interest on the loan provided it is paid back within 90 days) then a credit card would be a wise option.

Also, there is the need to understand the difference between a secured loan and an unsecured loan. A secured loan refers to a loan that is backed by collateral that can be seized in the case of a loan that defaults. An unsecured loan means that no collateral is necessary. If one wished to take out a personal loan for $15,000 such a loan would doubtfully be approved without some form of collateral presented. With Platinum credit cards the access line of the credit card will be in excess of $10,000 and it will remain an unsecured loan. As such, if one does not want to put collateral up on a loan then the better option would be to select a credit card.

Again, one is not better than the other the choice depends on need, preferences and the specific type of loan that is required.

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How to Select Between a Credit Card and a Loan

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