Loans and credit cards are used borrow funds and have many of the same standard credit provisions. In both loan and credit card agreements you will typically find funds offered from a lender at a specified interest rate, where the payments will be monthly, quarterly, or annually. But beyond having the similar attributes loans and credit cards share also have key differences, such as repayment terms, amount of credit etc.
LOANS
Lenders offer a variety of options of loans that can affect the credit terms of the borrower. A Loan can be used for many reasons. An unsecured loan can offer funds to finance large purchases, consolidate credit card debt, repair, or upgrade a home, or provide funding to fill a gap in receipt of income. Unsecured loans are not backed by collateral pledged from the borrower. There are several other types of loan with a specific objective such as home loans, auto loans, and other types of secured loans. These loans follow a standard procedure for credit approval, but they may be easier to obtain since they are backed by a lien on assets.
Pros
Generally suited for purchasing capital assets like homes or cars
- The rate of interest rate is comparative lesser than a credit card
- Borrower can avail funds in lump sum or on a quarterly basis
Cons
- Typically includes a service fee and may have other fees that increases the amount of repayment
- Property used as collateral, such as a car or home, can be seized if you don't repay in a timely manner.
CREDIT CARDS
Credit cards are classified into different classes of borrowing known as revolving credit where the borrower typically has ongoing access to the funds if their account remains in good standing. Revolving credit card accounts can also be eligible for credit-limit increases on a regular basis. The rates of interest of credit cards are usually higher than personal loans. Credit cards can come in many varieties and offer a lot of conveniences. All credit cards can usually be used anywhere electronic payments are accepted.
Credit also gives various rewards points such as cash back, points for discounts on purchases, points for store brand purchases, and points toward travel. can be utilized by the holders while making for subsequent purchases.
Pros
- Ongoing revolving credit cards only charges interests when funds are used for purchases
- For those with good credit scores, offers like 0% introductory interest rates, grace periods, and rewards are also given
- Accounts in good standing typically eligible for credit limit increases on a regular basis
Cons
- Interest charged on the credit card are higher than personal loans
The author Sushant Gangurde is a legal analyst @Taxblock India who aims to educate people about various tax laws and financial planning.
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