Loans and credit cards are two major sources of financing. They both have similar characteristics, but they also have some differences. Credit cards have credit card transaction fees and loans don’t have them. Have a look at what they are and how they differ from one another.
The first thing to know about loans is that they are a type of debt. A loan is an amount of money that is borrowed from a lender by the borrower, who agrees to pay back the full amount of this debt plus interest within a specified period.
Loan terms vary depending on what kind of loan you’re getting and the lender you choose (banks usually have different rates than credit unions or mortgage companies). Loans can be secured or unsecured, which means that your property may be used as collateral if there’s no other way to secure it—say, if you default on your loan payments.
A credit card is a short-term loan. This means that you borrow money from the bank with your credit card and then pay back the money over time. You usually pay interest on what you borrowed at an annual percentage rate (APR).
A credit card lets you make purchases on credit—that is, without having to pay for those purchases immediately—and gives you extended payment options for any balance left over once your statement arrives. Credit cards are not meant to be used as savings accounts; if that’s what you’re looking for, keep reading!
Purpose & Amounts
You can also use a loan to make recurring payments, like your rent. If you’re looking for an easy way to pay your bills and don’t mind the higher interest rate, this is a great option for you. However, the application process for a loan can take longer than it does for most credit cards.
You should only use your credit card if you have enough money in your account to cover any purchases made on the card (and their associated fees). Credit card companies may charge up to 30 percent of what you owe if they don’t receive a payment within 30 days of receiving the bill; however, some charge interest as soon as transactions occur on their cards.
Experts at SoFi say, “When it comes to choosing a credit card, however, you don’t necessarily have to think about interchange rates — that’s the job of merchants. What you do need to consider is any fees involved and whether the interest rate is a good APR for credit card.”
Length of time
If you’re not sure how long a loan or credit card will last, here are some of the differences:
- A loan is a long-term financial instrument that allows you to borrow money and repay it with interest over a period of time. Loans range from auto loans to homeownership mortgages.
- A credit card is a short-term financial instrument that allows you to borrow money and repay it with interest over a period of time. Credit cards can come in many shapes and sizes, such as store cards, rewards cards, secured credit cards and debit cards linked to bank accounts (which let you access your cash without paying interest).
So, you now know the difference between loans and credit cards. In the end, it comes down to what you need in terms of money and how much time you have until your next payday.