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Unsecured Loans vs. Credit Cards

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We all have moments in our lives when we need financial help and unsecured loans can seem like the perfect solution. But are they the only option? Having a credit card can prove to be very handy when you need that little bit extra one month, but what is the better choice? Are they that different? What are the similarities?

What you need to know about unsecured loans

Unsecured loans are the go-to for when you need money fast. Especially if you don't have the best financial standing or you need a larger amount of money, this is the type of loan you need. Unsecured personal loans have advantages, but the drawbacks are there, as well, especially compared to credit cards. If you're thinking about getting a loan like this, here are 5 tips for getting cheaper unsecured loans.

Where they excel

  • You can pay in instalments

Probably one of the biggest advantages of an unsecured loan is the fact that you can get a higher amount of money that you can repay in instalments. That means that if you need to make a bigger purchase, an unsecured loan is definitely the way to go, as opposed to credit card debt. Unlike a credit card, you don't need to pay this off all at once, but you can extend it over a longer period of time and pay smaller instalments that you can afford every month.

  • You don't necessarily need great credit

The other thing that attracts people to an unsecured loan is that you can get one even if you present no collateral, have bad credit, are unemployed, etc. You don't need to have an impeccable financial or credit history to apply or get accepted, as opposed to a credit card, where you need to demonstrate pretty good financial standing. Unsecured loans for bad credit are excellent solutions for people who have no other good options from traditional financial and lending companies. Always do a soft search before applying, by using a eligibility tool.

Where they fall short

  • The lending companies can be untrustworthy

Because some of these types of unsecured loans don't ask for much security, sometimes they are not offered by the most trustworthy of sources. You might run into loan sharks and sketchy companies that aren't authorised, so if you're not careful about who you do business with, you might end up in trouble.

  • The interest is very high

The problem with an unsecured loan is that, understandably, the interest is high. Since you don't present much security because you don't have collateral, the lending company has to protect itself somehow, so you end up paying more than you borrowed to make it worthwhile for the lender.

Credit Cards vs. Unsecured Loans

When you think about it, a credit card is basically like an unsecured loan. Just like you can get a cash advance from a payday loan, you essentially borrow money on a credit card that you later repay on your bill. So actually, they're not that different, but they definitely have some different advantages and of course, disadvantages.

Where they excel

  • They're from traditional financial institutions

A credit card is a pretty good option for a "safe" loan for you. Because it's issued by a bank, that means that you can be absolutely certain that any and all transactions are made legally and that you don't have to worry. In addition, should you run into financial trouble and be unable to repay your balance or your debt, you are much more likely to be able to strike a deal with the bank so they can help you pay off debt than you would with a third party lending company.

  • You can get money interest-free as long as you pay your balance

As opposed to an unsecured loan, where you pay high interest, no matter how quickly you pay back the money, credit cards have the advantage of coming with no interest attached, as long as you pay your balance on time. Yes, there's the catch – if you don't, the debt you acquire also acquires interest, in turn. If you're good about paying on time and you don't stretch farther than your budget allows, then getting interest-free money is a pretty good deal.

Where they fall short

  • You can't get a large amount of money

Of course, a credit card is good for smaller expenses, but if you have a large purchase coming up, you can't put that on your credit card, because there's a credit limit to take into account. So, if you want to buy a car, for example, a credit card won't help you, and you might want to look into some alternatives. That's because of the fact that the "loan", known as balance, needs to be paid off completely in order to not go into debt. The repayment term is shorter, and your limit depends on your credit score. The better the score, the higher the limit, but even so, it doesn't rival cheap unsecured loans.

  • You risk getting stuck in permanent debt

Credit cards can be seductive and dangerous. They're always there if you want to spend money and you get used to the ease and convenience of just spending money you don't have. Emergencies turn into needs, and needs turn into wants, and before you know it, you're spending more than you can afford. If you can't pay the whole balance at the end of the month, that becomes debt that you pay interest on. Once you get stuck in this vicious circle, it's difficult to get out of it and be back on your feet. Try to avoid getting into debt, at all costs.

Unsecured Loans vs. Credit Cards Summary
Unsecured Loans Credit Cards
PRO CON PRO CON
You can get a loan with bad credit High interest Interest-free money Smaller amounts of money
You can pay in instalments Sketchy lending companies Offered by banks Risk of debt

All in all, both unsecured loans and credit cards are great options for someone who needs help financially, but while a credit card is technically a type of unsecured loan, they are each better suited to certain situations. Both options have advantages and disadvantages and they can both be exactly the solution you were looking for, depending on your circumstances.

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