Loans and credit cards have many similarities. However, loans and credit cards do have distinct differences from each other. Loans and credit cards differ in their terms and how they are repaid.
Loan terms are definite. This means that the amount to repay, the interest rate terms, and the payment structure do not usually change. A loan is usually set for repayment within a specific duration such three, five, or ten years of monthly payments. The amount loaned does not change and the interest rate usually does not change (at least the interest rate stays within a rigid framework.)
The framework of the loan is usually concrete and predictable. This should allow the borrower to make a solid budget for repaying the loan. Loans are generally “safer” than credit cards because they are more predictable and do not change.
Although credit cards can be used responsibly, some dangers can arise because of their flexible and ever-changing nature. Credit cards are ever-changing lines of credit. The amount owed constantly changes. Therefore, the amount of interest charge is also constantly changing.
Balances can increase quickly on a credit card because there is no limit on the card’s use. Credit cards can be used for anything. Traditional loans are usually used for a specific, singular purpose. Credit cards can be dangerous. They can be used quickly to make up for lack of income or unexpected expenses. They can also be used irresponsibly to purchase items that would normally not fit into the monthly budget.
Another credit card danger is flexible terms. Flexible terms can quickly destroy your financial situation. Credit cards frequently charge late fees and can increase the total interest rate at any time for a variety of reasons. When the terms change on a credit card, the amount that you must repay monthly can drastically increase. Such a raise in required credit card payments has forced countless people in the past to file for bankruptcy.
Although credit cards are worse in some ways than traditional loans, it is best to stay away from both as much as possible. Credit cards and loans should be used responsibly. They should only be used for practical and convenience purposes. Credit cards and loans should never be used to purchase items you cannot afford. If you purchase items that you cannot afford with cash, you are putting yourself in jeopardy financially. Make loans and credit cards work for you instead of the other way around. They can be powerful tools if you use them only for convenience and investment purposes.