Credit Cards or Payday Loans: Which is Best?
A payday loan and a credit card are two financial instruments that provide the opportunity to quickly solve unexpected financial problems. But what is better? Credit cards or payday loans? Let’s consider the features of both products and their main differences.
What are payday loans?
A payday loan is a small amount (usually up to $1,000) issued for up to 31 days by a microfinance institution. The money can be spent on literally anything: home improvement, car repairs, business expenses, tuition fees, vacation, Christmas expenses, medical bills, etc.
The popularity of payday loans has been increasing in recent years. Moreover, in Texas, you can get fast cash not only in in-store locations but also online.
Keep in mind that this option might not be available in your state. Such loans are prohibited in some states, with several states capping the interest rate on loans.
Most often, when people decide to turn to microfinance institutions, they need cash urgently Therefore, the speed of receiving money is one of the most important features of this product.
It usually takes a few hours to get a payday loan. In rare cases, you may need to wait 1 business day. It all depends on the lender and method of issuing funds.
In order to get a quick payday loan in Texas, you only need to provide a few basic details, such as your government-issued ID, email address, home address, phone number and bank account. Microfinance organizations can lend you money even though your credit is bad. Payday loans for bad credit are extremely popular today.
Advantages of payday loans
Payday loans are in high demand among consumers all across the United States, as they have significant advantages over credit card cash advances or pawnshops.
Getting them is quite simple, fast, and sometimes even more profitable than personal loans.
- You are not required to do paperwork. No faxing, no collateral, no calls.
- You can qualify with bad credit.
- Money for whatever needs.
- Convenient repayment options.
- Easy online application.
- High approval rates.
- Same-day funding.
Some microfinance institutions also offer interest-free loans. Basically, such conditions are offered only to first-time borrowers (very rarely – for existing clients).
The accessibility of payday loans opens up the opportunity to get fast cash for pensioners, students, unemployed or self-employed people. It will be almost impossible for such categories of borrowers to borrow money from a bank.
Are there any downsides?
- Short term. Payday loans are usually issued for up to 31 days. In some cases, the term is several months.
- High APR. Perhaps, the majority will consider payday loans unprofitable when compared with credit cards and other banking products. But this is a worthy price to pay for availability and speed.
- Small amount. You can typically borrow no more than $1,000 (up to $2,500 in some cases).
What are credit cards?
A credit card is issued by a financial company and allows you to make purchases by borrowing money up to an established limit. That is, we are dealing with ordinary consumer lending, where the card is the direct tool for using finance.
A credit card is a very common and competitive product at the moment. Therefore, banks have to innovate in ways of promoting and selling. They began to issue cards for definite purposes. One is suitable for travelers, as it allows a person to exchange purchase bonuses for tickets, the second is more suitable for regular customers of chain supermarkets, the third has a solid cashback, and so on. In such a situation, your task is not just to apply for a credit card but to choose exactly the offer that suits you best.
You can apply for a credit card online on the bank’s website by filling out an application online. This is the most common way at the moment. Usually, the application is considered within 2-3 days, and the borrower is notified of the result via SMS or a phone call from the bank manager. To get a credit card, you need passport-size photographs, proof of identity (copy of PAN, Aadhaar, passport, etc.), proof of residence (utility bills, driving license, PAN, Aadhaar, etc.), latest salary slips, form 16, and bank statements. If approved, you receive the card by mail, courier or pick it up at the bank’s office. Separately, you receive a personal identification number (PIN code). After that, it is necessary to activate the card on the website of the issuer’s bank.
The card allows you to make purchases, make transfers, withdraw cash from ATMs. At the same time, you must remember that there is a so-called interest-free period for using the bank’s money when the client spends the borrowed funds and does not pay interest. And if you pay off your debt during this period, then in fact it is a zero-interest loan.
The reverse is also true. If you do not make the necessary payments on time, then sanctions from the bank will inevitably follow.
Benefits of using a credit card
Credit cards have a number of advantages over personal loans and payday loans:
- Installment plan for purchases in partner stores, when you can split the payment for a large purchase (for example, household appliances) into several monthly payments. This can be useful in emergency situations when you need to buy something urgently.
- Purchases on credit in partner stores, when you can make a small down payment, pick up the goods, and pay the rest of the amount over a long period of time with convenient fixed payments.
- A variety of benefits and bonuses. This includes discounts from partners, the possibility of exchanging bonuses for dollars or goods, etc.
- Credit score improvement. Almost all banks report bona fide borrowers or those who miss payments to major credit bureaus. Thus, if you receive a loan and pay it off on time, your credit score increases significantly.
What are some credit card pitfalls?
Of course, credit cards have a number of disadvantages, which should be discussed in more detail.
- Debt trap. In some banks, the loan agreement provides for a very high interest rate on the debt, which thus begins to increase rapidly. So borrowers need to calculate their strength before contacting the bank.
- Missed payments can affect your credit score. The lower it is, the more difficult it will be to get a loan approved by a financial institution, such as a mortgage. You can learn more about the concept of a credit score and ways to boost it here.
- Fees, payments and limits: you need to understand that the issuer is interested in you spending more, therefore, the higher your expenses, the lower the cost of servicing the card and the interest, as well as the higher the spending limit.
- Restricted use: There may be restrictions on how and where the card can be used. For example, many banks charge fees for cash withdrawals or overseas use, unless the contract states otherwise.
Thus, the use of a credit card can turn out to be both pleasant advantages and significant losses for its owner. It is important to know all the terms and conditions and use your credit card wisely.
What are the costs associated with credit cards and payday loans?
A two-week payday loan could have a fee of $15 per each $100 you borrow, which equals an APR of approximately 400%, much higher than the interest rate of an average personal loan or credit card. A payday lender charges an upfront fee to receive up to about $500, and additional fees are charged if you’re not able to repay it within a typical 2- to 4-week loan term.
Each time you make a cash advance transaction using your credit card, the bank will charge a fee. The fee charged is $3 or 3.00% of the transaction amount – up to $300, whichever is greater (or the bank will charge $3 if your closing balance was in credit the previous working day).
Besides, the bank will also charge interest on your cash advances (interest is calculated per day and you pay it each month). Note that cash advances have no interest-free period.
Keep in mind that both credit card cash advances and payday loans come with upfront fees and ongoing charges if you do not repay them quickly.
Payday loans have the highest upfront charge, with a fee of about $15 per each $100 borrowed, which adds up to $75 on a $500 loan. Though it can be quite affordable if the loan is repaid within the specified loan period.
If you repay the credit card cash advance within a couple of weeks, it should be cheaper than a payday loan because the upfront fee is less, and the interest won’t pile up.
Important: the total cost for credit card cash advances can be higher than a payday loan if you’re only providing the minimum payment for your credit card balance and the interest accumulates over several months or years.
Payday loans vs credit cards: which is better?
Getting a credit card is more difficult, and this is the main difference from a payday loan. In this case, the client receives a card with a certain limit of funds that can be spent on any needs. The borrower undertakes to repay them within the stipulated time and makes monthly payments depending on the amount spent and the interest set on the card.
It is worth saying that credit cards come with lower interest rates than payday loans. However, to get a bad credit credit card, the borrower will have to work hard. Firstly, to apply for a credit card, you will need to provide a lot of documents certifying your solvency as a borrower. The size of the credit limit depends on it. The bank will process your request for several days or even a week. Secondly, very few banks offer credit cards for bad credit, so if you credit is far from perfect, you’d better not waste time and apply for a bad credit payday loan. Thirdly, existing debts and loans play a huge role: banks put forward certain requirements for customers, so they can easily refuse to give you a credit card if you have existing debts, a poor credit score, or an unstable income.
Summing up, it is worth saying that the choice between a payday loan and a credit card should be made based on your unique needs. A credit card is suitable if you are not limited in time, you plan to borrow money constantly and for a long time, your credit history is good and you can provide proof of income. A payday loan should be used if you have bad credit or informal income, and if you need money urgently and for a short period.
If you need a loan for business expenses, consider a small business loan. Funding options for qualified business owners include bank loans, SBA loans, term loans, business lines of credit and more.
And remember: if you decide to get an online payday loan in Texas, then our lender matching platform will always come to the rescue! Just submit a request!
Tags: cash advance, credit card, finance, money, payday loans