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September 14, 2018

Credit Cards Vs. Installment Loans


Today it often is proclaimed that all loans are bad and need to be avoided at all costs, but the reality is that personal loans can actually be powerful and helpful financial tools when utilized in a smart and responsible manner.

Loans can be attained from many lenders, including Western Shamrock Corporation. However, in order to be able to utilize loans properly, you need to know the basics of what kinds of loans are available and what each kind of loan entails before you can decide what kind of loan is right for your individual needs. With this in mind, we will tell you the major differences between the two most common types of personal loans: credit cards and installment loans.

Credit Cards

Credit cards are one of the most common forms of personal loans despite the mentality that many have viewing credit cards as different from personal loans. With relatively high interest rates overall, credit cards are one of the more risky forms of loan due to the fact that once you have it, you have that loan essentially ever-present and pre-approved up to your limit, ready to go in the event you are tempted to make an impulse purchase, or thirty. With this ever-present feature, credit cards often receive much of the blame for the general declining wealth in America, as users have a hard time resisting the temptation to use their credit for unnecessary purchases.

Then there are often fees ranging from, essentially, an annual membership fee to fees for late payments, cash advances, foreign purchases, over-limit balance, balance transfers and so on. While it is possible, and acceptable, to use a credit card only for emergencies, the risk of making those impulse purchases is ever present and needs to be a factor to consider for anyone looking for some extra cash to have on hand. For those who decide a credit card is the best option for them, a credit score will play a strong factor in determining interest rates and even whether or not you can even qualify for a credit card. If you have poor credit or are just getting started on building credit, there are secured credit cards which require you to put down in advance however much money the credit card would provide, meaning you have to pay the bank or lender $500 to get a credit card with a $500 limit. Usually, after a year, your money is returned to you and your credit card becomes a full-fledged credit card. The catch is that you need to have that amount of money to begin with. If you need extra money for an emergency, but have no credit, you'll probably not get a credit card to cover it.

Installment Loans

Installment loans are loans that are provided in a lump-sum of money in the very beginning of the loan process, usually sent directly to your bank account or presented in check form, which you can then use in whatever way you need. An installment loan usually has a fixed interest rate and an established repayment timeline that can range in duration. Common examples of installment loans are auto loans, mortgages, and student loans, but they also are available as simple personal loans. Often, with more reasonable interest rates, personal installment loans are used to assist in getting out of, or consolidating debt by getting the loan and then using it to pay off higher interest rate debts like credit cards, payday loans, title loans, or variable rate loans, then paying off the installment loan.

As with most loans, your credit score will play a critical role in determining how much you can get and what interest rate your loan will carry. For an installment loan, unlike a credit card, there is no way around your credit score being considered. However, a bad credit score or the lack of a credit score will not prevent you from getting an installment loan, it will predominantly affect the interest rate. Your income and ability to repay the loan are stronger factors in determining the amount you are loaned.

Final Considerations

Whether you are looking to cover an unexpected expense or make a significant purchase, you need to consider what type of loan fits your needs. Once you decide on a type of loan to try and get, you'll want to prepare yourself for the application process by getting pay stubs, or other proof of income, and looking into and understanding your credit score. Regardless of common beliefs that loans are negative, when you assess your situation honestly and consider various interest rates and loan providers, you can certainly improve your financial future by using loans responsibly.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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Item Reviewed: Credit Cards Vs. Installment Loans Rating: 5 Reviewed By: EconMatters