Say you need to borrow money to outfit your nest or buy into investments. If you're trying to decide between applying for a short-term loan and using your credit card to get the money you need, you must weigh your options. While both options get you the money, there are distinct advantages and disadvantages of short-term loans compared to credit cards.
Short-term loans have specific repayment terms. Typically, the time you have to repay a loan depends on its type. Payday lenders often expect payment when you receive your next paycheck, but traditional lenders such as banks will give you a year, or longer, to repay the loan. A short-term loan can get you out of debt quicker than a credit card that has an open-ended repayment date. However, if you are unsure about your ability to repay a loan on time, using your credit card leaves the repayment schedule up to you so long as you make your minimum payment.
Short-term loans typically have lower interest rates than credit cards. An exception to this is payday loans that charge as much as 1,000 on their annual percentage rate (APR) according to the Federal Deposit Insurance Corporation (FDIC). Currently the average interest rate on cards with a fixed rate is 13.81 percent, according to Bankrate.com. Although the interest rate on a short-term depends on the loan's length, if you have good credit, your interest rate will be lower than most credit-card rates.
Your payment on a short-term loan can be higher than the minimum payment on a credit card even if the interest rate is less. Credit card companies determine your minimum payment based on a percentage of your balance -- 2 to 4 percent according to Bankrate.com -- while lenders of short-term loans divide the amount loaned by the repayment terms. If the balance on your card is $1,200, your payment will be around $24. If you have a six-month loan for $1,200, your payment will be $200 plus interest charges.
Time to Receive Money
If you use your credit card, you can access up to your credit limit immediately. Short-term loan lenders typically require at least a few days to process your application. Even if the lender processes your application as soon as you give it to them, you generally must take the time to go to the lender and apply. According to the Federal Trade Commission, lenders that accept applications without taking the time to check your credit are often scam companies that charge high interest rates that make paying off the loan difficult.
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