So you’ve got a big purchase coming up and you’re not sure how you’re going to pay for it.
Is it better to take out instant loans or to use a credit card?
Instant loans and credit cards both have their strengths and weaknesses and can be used for many different reasons. Depending on your own personal situation, one may prove to be significantly more advantageous than the other.
Let’s take a look at each option more closely to decide which one is best for you.
Instant Loan: What Is It?
Instant loans, also known as payday loans and quick cash loans, use your pay check as collateral.
The loan is deposited directly into your bank account, and you are expected to pay back in full (interest included) at the end of the month.
These loans have been very popular for the past several years, as they can be used in almost every situation. Let’s take a closer look at why people choose these loans:
Easy To Get
Getting a loan approved by a bank can often be a complicated process, requiring you to jump through a number of different hoops.
Instant loans, however, are incredibly simple. In fact, in many circumstances, it is possible to apply for the loan online and get approval within a few hours.
Due to their convenience, instant loans are often a great solution for those experiencing a financial emergency.
Use for Any Purpose
There aren’t any financial institutions governing the use of the money. Once your loan is approved, you can use it for virtually anything.
Many opt to use their loan to pay a bill to avoid a hit to their credit score or to take care of financial emergencies before their next paycheck.
A lot of people opt for an instant loan because it does not come with any hidden costs or extra charges.
However, do keep in mind that the interest rates for these loans tend to be significantly higher.
Good for People With Bad Credit
Those with a less than perfect credit score do not need to worry about qualifying for an instant loan. These loans are available for everyone, regardless of their credit score.
Of course, instant loans do come with a number of downsides. Let’s take a look at what these are:
As we stated earlier, an instant loan can come with a pretty hefty interest rate.
In general, you usually end up paying somewhere between R100 to R350 per R1300 you borrow. While this may not seem like a lot, it can quickly add up if you borrow R13000 or more.
Not a Long-Term Financial Solution
Even though payday loans are incredibly easy to get, they should never be used as a long-term financial solution.
Most often, people take out payday loans if they are in a financial pinch. And while the loan may alleviate your problems in the short-term, it does not fix the underlying problem that led you to a situation in which you needed the loan in the first place.
Unfortunately, not all payday lenders are legitimate business people. There are plenty of rotten apples who are looking to prey on the financially desperate and the poor.
Therefore, it is very important to be prudent about who you select as your payday lender.
Ok, now that you know the good, the bad, and the ugly of instant loans, let’s take a look at the alternative: credit cards. There are many reasons a credit card may be a better option, here’s why:
The average interest rate for a credit card is 15-18%.
Certainly, this rate isn’t low. However, it can still be a good deal compared to an instant loan rate- which can easily be as high as 400% and even up to 5000% in some cases.
Also, there are many credit card companies that offer 0% interest for the first 12-18 months. If you have a big payment to make that you know you can pay back quickly, that 0% interest can save you a ton of money in the long run.
However, keep in mind that these rates only last for a limited amount of time. You should know the date when the rate is set to jump and be prepared for it.
Don’t Have to Payback in Full
An instant loan is expected to be paid back in full at the end of the month.
Unlike these loans, credit cards allow you to borrow a large amount without having to pay it back immediately. Instead, you can chip away with minimum monthly payments.
For example, let’s say your balance is R13000. Your minimum monthly payment may be as low as R400. As long as you are making this payment, you won’t be penalized.
Many credit card companies offer cash back rewards and incentives every time you swipe or make a payment.
Ideally, you use your credit card for a specific purpose, repay the money at the end of the month, and then receive a small cash back reward for doing so.
No Shady Lenders
If you get your credit card through your bank, you won’t have to worry about shady lenders trying to take you for a ride.
Most banks want to see you paying off your debts on time. They can help you select a credit card and a payment plan that is right for you.
Downsides of Instant Loans
The truth is, many people don’t spend wisely and default on their minimum monthly payments, causing them to rack up a huge amount of credit card debt.
In fact, the average South African is R12000 in credit card debt.
Opening a credit card means leaving yourself susceptible to fraudulent activity.
Of course, most banks will compensate you for any fraudulent purchases. However, this can be a time-consuming process that involves a lot of paperwork and phone calls.
Qualifying for your first credit card can be somewhat easy. However, your credit limit on your first card may be extremely low- perhaps only a few hundred dollars.
If you have a bad credit score, qualifying for a credit card can be nearly impossible. Because of this, it may be better to turn to a payday loan.
As we stated earlier, qualifying for a payday loan can take as little as a few hours.
However, it can take up to 14 days to apply for and receive a credit card. Depending on your situation, you may not have this much time to spare.
Instant Loans Vs. Credit Cards: Bottom Line
As you can tell, there is no clear winner as to which option is better.
If you the means to pay off your credit card over time, then that is probably the best option. If you are really in a bind, then a payday loan may be your best bet.
Drop us a line if you have any questions about choosing between an instant loan and a credit card.