Money, as everyone knows, does not bring happiness. It is also no secret, however, that their lack can be severe. The inability to purchase what is needed at a given moment is often a reason for frustration or further trouble.
And yet situations in which (sometimes even suddenly, for now) additional funds are needed, and certainly everyone has found this out for themselves. Examples can be multiplied indefinitely – a wedding gift for a pair of close friends, a dream vacation, training to improve competence, consultation with a private specialist, fridge repair, purchase of a new washing machine, because the old one decided to break, cleaning the couch, which someone had flooded during a meeting with friends red wine … All this requires money. Where to get them, how to conjure them?
In the world of finance, however, there were solutions that allow you to borrow funds for a specific time or purpose, which can make life much easier. And take the whole package of worries off our heads. What can we choose? First of all, it is worth considering two options – a credit card and a loan. How are they different? What are the advantages and disadvantages?
First of all, it is worth paying attention to what some cannot understand? What’s the deal with these cards and how is it different from debit and credit cards since they both look almost the same? The difference is quite simple and significant. A debit card is the one we most often get when opening a bank account.
It is used only for payments at service outlets, it also allows you to withdraw cash from ATMs. But – note: we can only use it for funds that we have physically and have been accumulated in the bank account assigned to it. We can’t go beyond this amount, so we have full control over expenses.
It is different from a credit card. This is an instrument that is not assigned to our personal account, but to a bank specially created for this purpose – a credit card is actually a completely separate banking product that allows us to spend money that we do not have. Does it sound magical? There is no magic at all, only hard calculation. We use the credit card to spend the bank’s money, so we actually take out a loan that will have to be repaid.
Advantages and disadvantages
What is the major advantage of a credit card? The cost-effectiveness of the commitment. Well, unlike traditional credit, credit card holders pride themselves on the so-called non-cash period. It only means (or as much) that for a certain period we do not incur credit costs – we do not pay interest.
So we can completely pay for what we need, and pay the debt over the next few or several days, without paying a penny to the bank. Although this applies only to cashless transactions – those carried out in traditional and online stores, it still is a great convenience.
However, trouble begins when we do not pay back such debt on time. Interest is much higher than in the case of a traditional credit or loan. It may happen that the interest rate will be as much as 12%, and then the money borrowed will become one of the more expensive investments in our home budget.
Undoubtedly, it is risky because it is easy to fall into a spiral of debt. It is not uncommon for consumers to pay back their debts on one credit card, taking the second and third. This should be absolutely avoided. Cash transactions can also be a trap for this type of instrument – for example, withdrawals from ATMs.
Then the bank immediately charges a small commission. No matter what ATM we use! What’s more, when we remove money in this way and thus increase our debt in cash, there is no interest-free period. Therefore, the bank charges us the interest rate stipulated in the agreement, up to each amount that we remove from the ATM. This is disadvantageous because cash is sometimes necessary, needed already. If a credit card is the only way to get it, it could be one of the more expensive banking operations.
And how is it with the loan? A little different. First of all, in this case, we are not forced to bond with the bank. We have a choice of a number of financial institutions that offer so-called micro-loans, which are a convenient alternative to signing complex contracts with banks.
And while a credit card can be both reserved as a lifebuoy in an emergency and a long-term strategy for the home budget, so micro-loans, also known as payday loans, are primarily used as a way to finance current needs when there will be such a real need.
Advantages and disadvantages
In this case, we do not have to be afraid that we spend our money, for which we will have to pay dearly in special cases – in the case of loans we get a specific amount with clearly defined repayment conditions and the interest rate, which remains unchanged.
It is a safer solution – in the case of a credit card it is very easy to forget and spend a lot more than we can pay back in the interest-free period. Loans protect us from this – we make the decision about the amount we borrow, so we have time to carefully analyze how much money we need at a given time, by when we need to accumulate that money to pay back the loan.
If we contract it for a specific purpose, then there is no fear that we will spend it on things that we do not really need. The disadvantage of microloans may be relatively high-interest rates.
There is also a large cost that we will incur if we do not repay the commitment made on time, or if we apply for an extension of the repayment period. What’s more, usually you have to pay back the loan once. Fortunately, large amounts are not involved, which also gives you a sense of security.