RHS Finance

Many people treat credit cards the same way as regular loans. But that’s far from the way things work, especially if you want to have a more conscious and responsible approach to your finances. There are, in fact, many differences between the two in terms of advantages and disadvantages, as well as their generally intended application. Understanding these differences is critical if you want to make the most of your personal finances.

A credit card and a personal loan both have their uses at the right time. As long as you’re informed and don’t make the choice randomly, you should end up getting a good deal out of the whole thing.

Understanding the Basic Differences

Credit cards can be seen as very short-term loans in certain ways. However, as we mentioned above, they’re not quite the same thing. With a credit card, late repayment fees start kicking in quite fast, and you’ll have to deal with interest rates that might become almost impossible to manage at some point if you’re not careful. There’s a reason so many people default on credit cards as opposed to regular loans.

On the other hand, a personal loan will generally have more relaxed conditions, and you might be able to get away with paying less over a longer period of time. But in most cases, you’ll find it more challenging to get qualified for a good personal loan if you have a bad credit past (more on that below). It may also come with certain conditions attached that are not always ideal for everyone’s financial situation, such as requiring you to use the money towards something very specific.

Your Credit Score Matters

The way you’ve handled past lines of credit will be one of the main deciding factors in whether you can get a good personal loan or credit card. In most cases, if you have a poor credit score, you can pretty much forget about any good deals on the market. You might be able to convinced a lender to allow you to take out a larger loan if you have good collateral to put up, but other than that, you should not expect good results.

With that in mind, do your best to remedy that situation before taking out a loan in the first place. That might sound like silly advice since most people who need to take out a loan often don’t have the time to fix credit score issues, but there’s more to it than that. You should try to maintain your score in a good condition in general, so that when the time comes when you need to borrow money, you will have a better range of options available.

Long-term Benefits and Concerns

Credit cards and loans both impact your financial situation in a different manner in the long run. Generally speaking, as long as you’re able to make payments on time, a credit card might provide you with a better boost to your credit score over a longer period of time. This is even more valid for special cases where you’re incentivized to use the card even more often, such as cards with travel rewards.

Speaking of rewards, that’s another point in favor of credit cards. Many of them come with special perks attached that you just won’t get with any loan product on the market. These can vary greatly, but in many cases can provide you with better prices at specific stores, special deals when traveling abroad, and more. You might even be able to get some services like your monthly Internet subscription at a reduced price!

The Overuse of Credit Cards

There’s also another side to this though. Some people are quite careless with the way they use their credit cards, taking out one after the other simply because their banks allow them to. Keeping many lines of credit open and underutilized can incur a credit score penalty later on though, so make sure you know what you’re doing if you’re going for a new card.

This goes double if you’re currently still paying off a previous card! That’s possibly the worst time to take out a new card, especially if your goal is to “just” repay the old debt with the new one. That’s a terrible approach to personal finances and something which will put you on the fast track to a very difficult situation. Don’t underestimate the potential of multiple lines of credit to mess up your finances, especially if you’re not familiar with working with debt in the first place! When in doubt, you should go for a personal loan in cases that concern an immediate, one-time purchase. This will have a much smaller potential of messing up anything in your personal financial situation.

Personal loans have been getting a somewhat bad reputation in the press lately, and many people seem to have gotten scared off from the idea of taking out one in a time of need. Which is not a good thing at all – after all, personal loans were initially developed as a tool for exactly those situations. And when people are pushed away from the solutions that can actually work best for them, they usually end up stuck with less than ideal conditions which they feel forced to endure.

So, if you’re on the fence about personal loans yourself, let’s take a look at some of the more problematic points that you might have in your head, and see why they are not actually as bad as you might initially think.

Not All Lenders Are Loan Sharks

For some reason, many people seem to be getting traditional lenders mixed up with loan sharks. And while there are certainly some people on the financial market who’ll do their best to mislead you and take your money, this does not apply to everyone. Bad lenders are only a small subset of the market, and they’re hardly representative of the general situation. And depending on where you live, there might even be tight regulations governing lending that can make it difficult for unscrupulous scammers to thrive.

That said, do make sure that you check the terms and conditions of each deal as closely as possible. You can never spend too much time examining those, especially if you need to take out a larger sum of money. Any good lender worth your trust will make it very easy and comfortable for you to work with them though, and will readily explain any more unique terms of their deal.

Personal Loans Are a Useful Tool

We touched on this above already – personal loans are meant to be useful in the first place. They are designed to be used by people in a tough financial spot who have no other viable way out. And to that end, as long as you use your loan correctly, it can be a very smart move. Of course, be prepared to go through a difficult period after taking out your loan, as you’ll need to handle its repayment in a responsible manner. If you do this right though, a loan can allow you to pull through some of the most difficult moments in your life.

Don’t take this too far though – a loan is still a burden on your finances, and something you should be aiming to get rid of as soon as possible. You should not see it as something you can repeatedly rely on to have more money around. Some simple calculations will show you that this kind of lifestyle will actually put you at a disadvantage in the long run.

They’re Not a Magic Wand for Fixing Financial Problems

Which brings us to another important point. While loans are designed to help you in tough situations, they still have their limitations. You need to plan ahead and ensure that you are meeting each situation with preparedness and determination. Don’t wait until the last moment to pay that bill, only to discover that your account was drained by an overdraft fee without you realizing it, and now you need to take out an urgent loan to fix that situation.

That’s also why some people see loans through such a perspective. They only take them out when their situations get really bad, so loans are ultimately associated with negative experiences in their minds. It doesn’t have to be that way though – not if you are careful about each line of credit that you open. Taking out a second loan is not the end of the world, as long as you understand the implications and know how it’s going to affect you later on.

Good Information Is Hard to Find

There’s also another problem that people rarely consider. There’s an overabundance of information about loans on the internet, and not all of it is equally useful. In some cases, you might be pushed towards the wrong decision by materials created by people with an agenda. It’s important to have a critical attitude when learning about loans on the internet, and always consider that there might be more to a situation than you’re seeing at a glance.

Ideally, you’ll want to discuss any specific terms and conditions directly with your bank, or whoever else you’re planning to borrow from. Don’t trust random people for anything when your financial security is on the line! On the bright side, you have a lot of potential to learn everything you need as long as you are patient and sift through the available information as best as you can.