Payday loans vs credit cards
Payday loans and credit cards are the two main sources of credit available in the United States. They are very similar in many ways, but the differences are significant. We’ll expand on some of the important differences that make credit cards a significantly better choice than payday loans.
Similarity: payday loans and credit cards are short-term loans
Both the payday loan and the credit card are for immediate short-term expenses. They give you a small amount of extra money that you can use whenever you want. They both charge interest on the amount of money you use and require payment within a short period of time ranging from a few weeks to several months, but for a payday loan you can use services such as MoneyZap and for a credit card you need a real bank. This is where the similarities end.
Differences between payday loan and credit card
- Payday loans are cash and credit cards are a line of credit. A $300 paycheck advance puts $300 cash in your pocket. On the other hand, a credit card gives you the ability to spend up to $300 but does not immediately add money to your bank account. One important difference is that some bills such as rent, utilities, cable, and cell phone sometimes cannot be paid with a credit card.
- Payday loans give you the full amount at once and charge you for it. A $300 paycheck advance gives you $300 right away. Even if you don’t use the money, you will be charged interest on the full $300. On the other hand, a credit card has a Credit limit which only charges interest on what you use. The key concept here is the use of funds. A payday loan makes all funds available for use on day 0. Thus, they charge you interest on the full amount from day zero. With a credit card, you only use the funds when you make a purchase with the card. Therefore, the interest counter starts the moment you swipe the credit card and only for the amount charged. If you never use your card, you will never pay interest on a line of credit.
- Credit cards have an interest-free grace period. As noted above, the payday loan interest meter starts immediately. You only pay interest on credit cards for what you use. The bonus with credit cards is what we call the recent activity grace period or floating credit card expiration. It’s a wonderful zero interest rate period from the day you swipe your card until your next credit card statement. If you pay the amount of your purchase when you receive your next statement, you will pay 0% on that purchase. This period can be up to 30 days if your purchase occurs immediately after your last payment. Strategic purchasing planning can help you manage your money and minimize interest charges on your credit card.
- Payday loans are more expensive than credit cards. The average US credit card charges around 18% per year, but most entry-level credit cards charge around 22%. On the other hand, the average payday loan requires more than 400% interest. Traditional payday loans are much more expensive than credit cards. That’s why, if you have a payday loan and a credit card, you should always pay off the payday loan first. Installment loans are no exception. In almost all cases, your loan rate will be lower. You should prioritize repayment of loans with higher interest rates to save on interest charges.
- Payday loans don’t have flexible payment schedules and amounts like credit cards. When you remove debt from a credit card, you can pay off the balance at any time and in installments. There is a monthly report and you have to pay the minimum amount at least once a month. The loan allows you to repay principal and interest flexibly at your own pace, allowing you to choose how much and when to pay. Meanwhile, with traditional payday loans, you have to pay a certain amount on time. Traditional payday lenders make it difficult to change payments and often charge fees for changes. It’s a strategy to help them make money.
You can get a traditional payday loan without a credit check, but credit cards require a credit score. Credit cards are cheaper, offer a more flexible source of credit, and are more lenient when it comes to repayments. Why doesn’t everyone have a credit card? You’d be surprised how many people don’t realize this.
Nevertheless, having a credit card requires a good credit history. Even introductory cards that only give you a low credit limit will not be available to those with a credit score below 600 or very little credit history.
Payday loans and credit cards are the two ends of the spectrum. We understand that not everyone can qualify for a credit card. Several MFIs have been established to help people with poor credit scores get emergency money and rebuild their credit with installment loans.
Online loans have the lowest cost on the market and the most flexible repayment terms. We know there are financial emergencies and unforeseen events. Reliable MFOs can delay and halt payments to keep your loan within your budget.
An interest-free loan is most often issued by the management of the company to its employees as well as by the State to certain categories of citizens. A bank loan always provides for the accumulation of interest taking into account the main objective of a financial institution to make a profit.
As advantages of the loan, it should be noted that there is no overpayment and no connection with the credit history of the borrower. The basic characteristics of a loan that distinguish this type of loan from a standard loan are:
- transfer of property for temporary use to another person for a specified period after which the debt is likely to revert to the owner without the possibility of replacing it with a similar object or the payment of compensation;
- no obligation to pay interest for the use of property.
A large number of individuals and organizations often use different types of loans to solve certain problems. At the same time, many borrowers tend to confuse loan and credit as credit is a type of loan with a fine line of differences between the two definitions.