While most people approach taking out loans with great thought and care, hardly anyone puts the same amount of consideration when applying for a credit card as there’s no immediate financial commitment. However, what most people don’t understand about credit cards is that they are also a type of loan - except they are unsecured. Most personal loans and leases from banks tend to be secured loans which require putting up assets as collateral and hence, have extremely long and complicated application procedures.
Unsecured loans are loans which don’t require the applicant from putting up any assets as collateral for obtaining the loan. Due to their nature, they are usually quick and uncomplicated to apply for, and tend to carry higher interest rates as the risk of default lies mainly with the lender. There are many benefits of unsecured loans, which also apply for credit cards.
Credit cards are a form of unsecured loans and they have the same set of features, advantages and disadvantages.
You can have your credit card in hand within 7 days after application provided your credit history is clean. Once you have your credit card in hand, it doesn’t get quicker than simply swiping it.
When applying for a credit you would have noticed that you only need to provide proof of identity and around 3 months’ salary slips. The process is extremely uncomplicated, and using your credit card and paying bills even more so.
Credit card purchases are a form of one-month loan where you get your bill at the end of each month which you need to settle in full to avoid paying any interest.
One of the best parts about owning a credit card is that you are guaranteed a line of credit at any time of any day in virtually any situation should you need a large sum of money.
High Interest and Fees
Like other forms of unsecured loans, credit cards charge high interest rates on any pending payments. They also charge exorbitantly high fees if you wish to make a cash advance from your line of credit, in addition to annual fees etc.
Other Forms of Unsecured Loans
Aside from credit cards, there are so many other forms of unsecured loans. While the most commonly-known are payday loans, salary advances and cash advances, any loan can be an unsecured loan - even personal loans for wedding, education and medical expenses.
Payday loans, for instance, are where a customer borrows a sum of money from a lender at a fixed interest rate payable the moment he receives his salary (on payday). The borrower does not need to provide any extensive documentation or proof of income, which means that the risk of default is entirely on the lender (which justifies the higher interest rates).
Credit Cards vs Unsecured Loans
Some of the key differences between credit cards and unsecured loans are as follows:
Credit cards are a permanent line of credit available to you once you have applied for and received your credit card; unsecured loans are a more short-term lending facility where you apply for a loan each time you need one and once you settle it in the stipulated time frame (1-3 months), the transaction is completely finished. If you need another unsecured loan, you need to apply again.
Unsecured loans have more flexible repayment periods where you can agree on the repayment period with the lender at the time of taking the loan. It could be just a few weeks, up to several months. Credit cards tend to have fixed payment cycles where you receive a monthly bill which you must settle without fail to avoid high interest fees.
Unsecured loans charge interest for each transaction made while you can avoid paying interest on credit cards if you settle your bill in full each month. With unsecured loans, you are aware of the amount of interest you would need to pay prior to getting the loan. Your interest payment for credit card usage depends on the pending bill you leave.
Both credit cards and unsecured loans have their own set of advantages and disadvantages. While at first glance it seems that credit cards are an easier and cheaper alternative to unsecured loans, the reality is that this very assumption might end up costing you more in the long run. The fact that you need to manually apply for payday loans, salary advances etc. will deter you from going into debt regularly unlike with credit cards, where you don’t even realise that you are taking out multiple loans every time you swipe the card.
While in recent times, unsecured loans have received an undeserved bad reputation, there is no denying that unsecured loans serve a portion of the population that the current banking system completely neglects. For most people who find themselves in a financial emergency, unsecured loan providers are often a lifeline. However, most customers are in a hurry and they tend to not read the terms and conditions of the unsecured loan and get charged late payment fees when they delay repayment by just a few days.
Depending on the nature of your requirement and your overall financial capability, there are instances where credit cards might make more sense as well as situations where taking out a payday loan might be the better alternative.