Payday Loans vs. Credit Cards: Which Is Better For Your Financial Health?
The instability of the economic climate has prompted a notable rise in borrowing activity. Consumers are now faced with a wealth of different borrowing methods, many of which give them access to the additional funds within minutes.
The traditional options such as the credit card are still widely available on the market in their numerous forms. Yet there has recently been a surge in popularity of alternative options such as the payday loans, espicially from those unable to obtain credit cards.
Essentially, both execute a similar task; providing borrowers with cash which will then need to be paid back with interest however both options are accompanied by different advantages and disadvantages. Before considering either option, consumers should ensure that they are well-informed of the differences between the two products and both the benefits and the drawbacks.
Difference 1) Cash vs. Card.
The first and most obvious difference between the two is that a credit card will provide you with a credit line controlled by a plastic card. The cardholder can use the card to make credit purchases within the set limit. Borrowers are charged interest on all purchases made on the card. The credit card can be used to withdraw cash from an ATM but the majority of lenders will charge for this.
Payday loans however deposit cash into the borrower’s account. Interest is chargedon the loan as a whole. It is taken as a lump sum as opposed to a credit line. Consumers can withdraw this loan as they wise or spend using cards attached to the account which it was deposited in.
Difference 2) Application Procedure
Credit cards are offered to consumers based the lender’s scrutinisation of their credit rating and borrowing history. This will determine the credit limit that they are set and ultimately whether the lender offers them the credit card at all. In short, those with poor credit scores stand less chance of obtaining a credit card and those with good credit scores often receive the highest limits. The credit check procedure can prove time-consuming and could take up to 30 days to be approved.
The payday loan is typically not based on a consumer’s credit score therefore it tends to be a quicker process, with many loan providers stating that successful consumers will be approved within minutes. Sometimes the lender will require proof of employment or a bank statement, other applications can be completed via a form on the internet. These loans are often referred to as ‘yes loans’ as it is believed that people are rarely refused.
Decisions for payday loans tend to be based on whether the consumer earns enough to be able to repay the loan within the set agreement period, typically at a set date which tends to be around their ‘payday’. Often the borrower will either be required to write a post-dated cheque for this date or agree for the amount to be withdrawn from their bank account then.
Difference 3) Interest rates
Typically, the interest rates charged by payday loan lenders tends to be significantly higher than those charged by banks. The rates charged on payday loans can be as high as 30pc and since the interest tends to be based on periods of around a few weeks, the APR is often significantly higher than those of credit cards.
However the limits of payday loans tend to be significantly lower than credit cards. Consumers do not have the option to borrow thousands as limits tend to be set at around the one thousand mark due to their unsecured nature.
Which to choose?
Both options have both advantages and disadvantages therefore it is impossible to give an generic answer of which is the better option. If you are considering the options then it is fundamental that you acknowledge that both come with risks and drawbacks and weigh up the choice which works best for your circumstances.
Payday loans charge very high interest rates and should not be used as a long term option however they could possibly offer a ‘quick fix’ until payday for responsible borrowers who are unable to obtain a credit cards.
Credit cards also come with drawbacks but can be a good method for sensible borrowers to budget effectively and build their credit score if they borrow responsibly.
The two key rules are to repay efficiently and only borrow amounts that you know you can afford to pay back in the near future. If you make unwise borrowing decisions, you could end up paying them off for the rest of your life. Seeking independent financial advice could help to provide you with impartial guidance on the borrowing options which best suit your needs.
This post was written by John Hughes who is the resident blogger at www.independentfinancialadvisor.co.uk, a site that provides access to financial advisors as well as to debt advice charities for those struggling with their debts.