Cash loan or credit card? This question often spends us sleeping. When looking for information on how to finance your expenses, we often face this choice. What will be more convenient for us and most importantly more profitable?
Credit Card as an Alternative to Cash Loan
Banks offer loans with an interest rate of 5-8% per annum. That’s how it looks in advertising. But just read the small print to see that APY (Actual Annual Interest Rate) is actually high and ranges from 17% to 24% and more. This means that the interest costs include commission, insurance and preparation fees. This significantly increases the final cost of the loan and the amount we finally have to return. Applying for a loan is quite simple at the moment and we can often do it online. Unfortunately, despite the advertisement, the receipt of the loan may take a while. Depending on the bank, it can be one day or a week.
Unlike cash loans, credit cards are not popular. Often, credit cards are proposed in the promotion and treated by banks as an addition to the account. Some customers of banks have a credit card that they do not use, treating it as a hedge for a rainy day. Fortunately, you can apply for a card at any time. Of course, you have to prepare for the card fees. In addition to the interest rate, the biggest cost of the card is the annual fee. Most often it is about PLN 50, but in some offers we can be exempt from it. As far as the interest rate on the card is concerned, if the credit card used is paid by cash without payment, we will be charged interest only after the interest free period. The length of the interest-free period may vary depending on the bank and the type of card. Most often it is from 45 to 61 days. Right away, interest will be charged to us if we withdraw money from an ATM using a credit card or we will make a transfer from the card account. Such transactions are treated as cash and are not covered by the interest-free period. The fee for cash withdrawal or transfer may amount even from 3% to 10% of the paid amount or not less than 5 – 10 PLN. It’s a lot. For example, for the payment or transfer of PLN 1000 you will pay from PLN 30 to PLN 100 commission. However, the interest rate on credit cards does not exceed 10%. This is a much lower interest rate than cash loans, which is even over 24%. Thanks to the fact that we use the card, we use an interest-free or low-interest loan. Until two months we will not be charged interest on the card limit used, ie for two months we do not incur any costs for borrowed cash. For those who are not very disciplined, flexibility in paying off the card may turn out to be a problem instead of an asset. It is easy to forget and overburden your finances, so if you have problems, it is worth spreading the loan on the card into installments. You should also never treat a credit card like a debit card. It must be remembered that for cash transactions, there is no interest-free period. If we withdraw cash at an ATM using a credit card, we will be charged interest immediately. A serious downside if we need to finance our expenses with live cash. However, in contrast to a cash loan, the credit card is not charged with additional costs such as commission or insurance. However, various discounts and loyalty programs are prepared for credit card holders. In addition, in the case of distance shopping, the customer’s interests are protected by a chargeback procedure.
Merits and Demerits of Credit Card.
Pros of using a credit card:
- Non-interest period
- Low interest rate
- The ability to re-use the repaid cash
- Visa, MasterCard or bank loyalty programs
- The possibility of changing the debt on the card in installments
Pros of cash loan
- High loan amount up to 200,000
- The possibility of using the loan in any way
- Long crediting period up to 10 years
- The ability to take credit online
Cons of credit card
- Having an unpaid credit card reduces your creditworthiness
- Annual fee for using the card
- Cash transactions bear interest immediately
- High commissions for withdrawing cash from an ATM and transfer from a card account
- Danger of falling into a spiral of debt
Cons on cash loan
- Necessity to prepare a certificate of earnings and employment
- High interest rate
- No possibility to use the repaid amount again
As you can see, the credit card is not as bad as it seems. That is why customers of banks look more and more favorably at their credit cards, which have been overwintering in a wallet or drawer until now. The advantage of a credit card is certainly the possibility of flexible repayment of debt. We can only pay the minimum or the whole amount. We also have the option of re-using the repaid cash. Until we cancel your credit card, we will always be able to use the credit limit. The result is that we have access to additional cash-free money necessary to obtain a cash loan. On the other hand, once the loan has been repaid, it builds our credit history nicely and does not threaten with negative consequences. Unfortunately, having a credit card tempts you to excessive expenses, and thus you risk falling into a spiral of debt.
Let’s compare the costs of cash loans and credit cards. Let’s assume you need 5,000. for expenses and you want to pay back this amount during the year. In a cash loan, for example Pekao sa, the cost of borrowing 5 thousand. will amount to PLN 724. Installments of such a loan are PLN 477. The projected interest rate on cash loans in Pekao is 9-10% and the commission ranges from 4 to 6%. Using a credit card such as Citibank MasterCard World for the sum of 5 thousand, the interest rate will be 10%. The Citibank MasterCard World card is issued free of charge, there are no monthly (annual) fees for using the card. If we do not withdraw money from an ATM or make a transfer from the card, we will not incur any additional fees. The minimum repayment of the card is PLN 30. If we want to treat the card as a loan, we will pay only 10% interest. Assuming that we pay around PLN 445, we will pay the card in 12 months, and the cost of borrowing 5,000 will amount to PLN 226 (including a free two months without interest). That is why it is worth considering what is more profitable and the risks associated with using the card or credit. Regardless of what we decide on, it’s important to choose a way of lending for us the most convenient and safest for our finances.