Why Choose Installment Loans Over Credit Cards
- Kul Deep
- Updated on July 9, 2024
In this consumer-driven world, organizing finance is crucial for achieving different financial goals and long-term financial stability. If the finance is not organized properly, there is a need to borrow money to solve the different financial needs. When it comes to borrowing money, two popular options come into mind, installment loans and credit cards, though they both work differently.
Installment loans come with lump sum money which the borrower receives from the lender after applying online or in person. The loan amount is paid through monthly repayments including a predetermined interest rate for a fixed period.
With credit cards, the borrower can spend the credit amount up to a predetermined limit. He can spend it and must repay it and then spend it after repaying the previous credit. Sometimes they might be required to make minimum monthly payments but there is no fixed date to pay the credit amount in full.
If you want more information, see our detailed article on online installment loans.
Reason to Choose Installment Loans over Credit Cards
Undoubtedly, both installment credit and revolving credit are popular options among people to use during financial uncertainty in the United States. But installment credit is used in different states with great numbers. Like Texas, in this state, most people use installment credit to achieve different financial goals. Rather, installment loans in Texas with no credit check have been a valuable option for people who want urgent cash to solve financial crises.
Let’s see why installment loans are a better choice than credit cards.
Fixed and Predictable Payments
Installment loans offer fixed and predictable monthly payments in which the borrower knows how much he has to pay every month. This predictability makes budgeting easy, decreases the risk of unexpected fluctuation in payment amounts, and provides greater stability in finance. For more details on payment stability, you can learn about how loan payments are calculated
Difference in Interest Rates
Installment loans have lower interest rates compared to credit cards which means they allow the borrower to save maximum for the long-term loan. In general, credit cards have a higher interest rate which results in paying more money in the form of interest even in the short period.
Ability for Large Purchases
Installment loans are meant to be made for small to large purchases. With installment loans, the borrower can finance significant purchases like a vehicle, home, home renovations, etc. These loans with structured payments and lower interest rates make it easy to pay for large purchases which also helps to reduce the extra burden of managing the overall budget.
Help in improving Credit Scores
Installment loans potentially help in building credit scores if responsible borrowing and payments are done on time. Making timely payments or not missing any repayment makes the individual a responsible borrower in the eyes of the credit bureau and a responsible borrower can get better loan terms and credit products in future borrowing.
Avoiding Temptation Offers of Credit Cards
Installment loans come with a fixed amount and the browser is supposed to spend it on a required task, whereas credit cards even though have a fixed amount to spend but they have some tempting offers to attract the borrowers from time to time which leads them to spend money on some unnecessary products which they do not need some time.
Disadvantages of Credit Cards Compared to Installment Loans
Undoubtedly, credit cards are convenient, and offer flexible ways to use them but they have some disadvantages.
Higher Interest Rate
Credit cards often carry high-interest rates compared to installment loans. If any individual spends from time to time with a credit card without being aware of the bill and can not manage to pay the bill at a particular date, the interest rate adds up to the unpaid amount. Generally, people with less knowledge become victims of high interest in credit cards.
Tempting Minimum Payments
Credit card companies often require minimum monthly payments which might be a smaller part of the total due payment. It is very tempting for the person carrying a credit card, but, this minimum amount generally carries very high interest, so it might be a short-term relief for the user but ends with paying high interest and becomes harder to be free from debt.
Revolving Credit Nature
With installment loans, you get a fixed amount and even repay them in fixed monthly repayments, thus the user has a pre-plan to arrange the payment on the due date. On the other hand, with a credit card, the user is allotted a determined amount which he can use maximum to the determined amount. This temptation leads him to the trap of debt without thinking of repayment plans.
Impact On Credit Scores
Credit cards might negatively impact your credit scores because in general, the credit card holder spends with a credit card without considering repayments and the situation of inability to pay a large due amount can severely damage his credit score. This is because the high credit card balance relative to the limits can damage his credit score.
For Which Expenses Installment Loan Is Better Than Credit Card
Installment loans offer a flexible approach to use them for various purposes compared to credit cards. These loans can be a beneficial way to use them for different tasks. They have a flexible nature to use and now here are some expense options that can be better than credit cards.
On Big Purchases
Installment loans come with different loan limits and can be used to make big purchases such as purchasing a vehicle, financing home renovations, or buying furniture. With these loans, getting money upfront can be used to fulfill various types of purposes and the loan amount can be paid through fixed monthly installments on a fixed date with a determined interest rate. On the other hand, with credit cards, it is impossible to purchase the items possible with installment loans. For more on the potential amounts you can borrow, check out the different installment loan limits.
Education Expenses
Installment loans can be used for student loans or education loans as well. Whether you need it or a family member, it is easily accessible and can be repaid in installments at low interest rates. But on the contrary credit cards cannot give you such benefits. On the first hand, they come with high interest rates, and might not be usable for such kinds of purposes.
For Medical Expenses
If unexpected expenses related to medical occur, installment loans prove a boon in that situation. Rather than relying on credit cards to pay your medical bills even with high interest, these loans can be used to handle the worst financial situations. This is because installment loans offer structured funds with fixed monthly payments which include determined interest rates that enable you to manage your monthly payment even without any hassle.
Debt Consolidation
The individual who is struggling with high-interest credit card debt can make a smart choice to handle those with installment loans. In debt consolidation, multiple high-interest loans can be paid through a single lower-interest loan. Installment loans allow the individual to repay the loan amount with fixed monthly installments even with lower interest compared to credit card debt.
Frequently Asked Questions
Are Installment Loans Cheaper than Credit Cards?
Yes, installment loans prove cheaper than credit cards as they carry lower interest rates compared to credit cards. Also, they come with fixed interest rates and monthly installments which means the borrower has to pay the predetermined fixed amount on a fixed date. Other hand, credit cards include high interest rates which are sometimes unaffordable to pay.
What Happens if Installment Loan is not Paid?
Installment loans come in secured and unsecured types. With secured installment loans, the lender requires security like a vehicle or property to recover the loan amount in case of being a defaulter. Other hand, unsecured installment loans do not require any collateral or security, the lender only approves loans based on your regular job or stable employment status. In case you miss the payments with unsecured loans, the lender might take legal action against you.
Is Credit Card Secured or Unsecured Loan?
A credit card might be both secured and unsecured. In general, credit cards are unsecured and they are provided to the customer after evaluating his credit profile. A person with poor credit needs to submit security against getting a secured credit card. Once he can turn his poor credit into good, he also can be eligible for an unsecured credit card.
What Happens If I Do Not Pay My Credit Card Bill?
If you do not pay your credit card bill, first you will suffer a serious credit score collapse. You will be charged with late fees and some other type of penalties. Your lender might take a legal action against you.
Conclusion:
Installment loans have many advantages compared to credit cards, but credit cards also help to overcome the problem of unexpected expenses in your daily life. Installment loans are known for their well-structured monthly payments which include fixed interest rates and the borrower can manage the amount before the due date. On the other hand, credit cards do not have a fixed amount to pay every month, the amount that is spent by the borrower has to be paid. Apart from this, by understanding loan types and interest rates, individuals can make informed decisions to save themselves from being trapped in debt.
