December 13, 2019 admin 0Comment

Have you ever asked for funding for an extra or unforeseen expense (damaged the car engine or needed urgent surgery, for example), but never quite understood which option you should choose? Both credit card and loan applications are valid solutions for such situations, but there are some differences between them. Learn to distinguish and find out which one is best for you.

Credit card and personal credit are personal finance tools available for you for a variety of purposes. Both provide a line of credit that allows you to get money quickly and pay it back later in installments.

Although similar, these financial products have some differences you must know to consciously choose one or the other.


Troy and Anne need funding

make money

To illustrate the advantages and disadvantages of each solution, let’s look at James and Anne, a 35-year-old couple with a combined income of 2,000 dollars. They pay an installment of 300 dollars of the car credit they had to ask to buy a car with more than two seats, as they await the arrival of their first child, André.

At a time of greater expenses for the couple, the unexpected happened: the fridge was damaged and has no repair. Since one of the same size would be small for all three, the couple decided they would have to buy a larger one: an American-style refrigerator with an average price of 1,500 dollars.

After comparing the various products on the market, Anne and James came to the conclusion that, to have the ideal refrigerator, they would have to pay it in installments. As such, the need to apply for a loan was more than obvious, so they wondered: should they really apply for a loan or choose to use their credit card? Let’s see how much each of these options costs.


Is it worth it to apply for a loan?

loan application

The couple compared offers from the market to see if it would be worth it to borrow. For a non-performing personal loan of 1,500 dollars with a repayment term of 24 months.

With a monthly installment of approximately 70 dollars, Anne and James would have a total credit expense of 370 dollars (corresponding to the value of the car installment plus the amount of the fridge).

Thus, assuming they do not have a home loan, their effort rate would be less than 20%, meeting the recommended values ​​(the effort rate should not exceed 33% of household income).

Another aspect that James and Anne should consider is the Annelysis, in addition to interest rates, of the Total Amount Imputed to the Consumer (MTIC). This encompasses all the fees and interest that the couple will have to pay over the course of the loan, demonstrating what the total cost of the loan will be.


Or is it more advantageous to use a credit card?

credit card?

Payment in installments on credit cards is possible but entails payment of interest. If they did not want to pay interest, the couple would have to settle the debt within a period of 20 to 50 days.

Since this solution would not be viable, as payment would have to be made in full and in a short time, the couple decided to compare other solutions in the market in order to choose the most advantageous one for their profile. Your preferences have been for products that allow for exemption from annuity payments.

After an Annelysis of the total amount they would pay on credit, Anne and James easily realized that for the amount they needed, it would make more sense to apply for a loan.

Since interest rates are higher on credit cards, the total amount payable by the couple will be higher on this option. There are only two personal credit solutions that have a higher total cost than the lowest cost credit card offer.


But then how do you know which one to choose?

When to use credit card?

credit cards

Credit cards are great for regular purchases, usually smaller, allowing you to pay off your debt within the interest-free timeframe. You should choose a credit card to pay for products that do not exceed your income and do not exceed your monthly expenses.

If you pay your card debt before the deadline, you avoid paying interest rates. In addition to delaying the payment of interest on purchases you have made, you also get some advantages, such as the accumulation of airline miles or the possibility of having cashback just by using your credit card.

Another good feature of credit cards is that you can pay some installment purchases, which helps a lot in mAnneging each family’s personal finances. However, be aware that there are associated interest rates, so the total amount payable will tend to be higher.

In Portugal, more and more people shop online. This is one reason why many people decide to have a credit card because it makes life easier for consumers by allowing them to buy and complete online transactions. This is much more convenient than paying cash or on delivery.


When to apply for a loan?

apply loan

On the other hand, personal credit wins this race when we talk about larger value purchases, usually when it takes months or even years to pay back. Such funding can be used for a variety of purposes, from medical emergencies to buying a car or taking those vacations you’ve always wanted.

It is now possible to apply for a loan and have the money on time. The so-called fast credit allows the customer to have the amount requested in their bank account within just two business days. In addition, interest rates are lower compared to credit card rates.


Do you know that…

Do you know that…

Currently the minimum offered by some financial institutions for a personal loan is 300 dollars.

Another advantage of applying for a loan when compared to using credit cards is that it is easier to plan your finances as payments are pre-programmed. Since you can pay back personal credit over longer periods of time, you can choose to borrow a large amount and break it down into small payments.

Both applying for a loan and using a credit card have their advantages and disadvantages, and it all depends on the purpose for which you need the financing.