What Is the Difference Between a Bank Loan & a Credit Card?

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There are two main options that enable a person to borrow a relatively large amount of money: bank (personal) loans, and credit cards. Each has its advantages and disadvantages.

Advantage of Credit Card

Credit cards are unsecured debts, meaning the money is extended to you with no collateral or security. They are revolving debts, which means that you can access and repay the debt again and again without limit. A credit card enables you to pay back the borrowed amount in full with no interest and/or penalty for early or full payment.

Disadvantage of a Credit Card

The interest rates on credit cards are generally higher because the "loans" present a higher risk to the financial institution. In a bankruptcy, unsecured debts can be discharged, and the bank would receive nothing if you should become unable to repay. Some credit cards also charge an annual fee as well as interest, and if your payment is late your interest rate will most likely increase.

Advantage of a Bank Loan

Bank loans do not charge an annual rate or finance charges, and regardless of payment status, the agreed upon interest rate does not change (excluding mortgages). Interest rates are generally much lower than credit card rates. Upon approval, a bank loan will issue a check immediately for the full amount of the loan, which you are able to use at your own discretion.

Disadvantage of a Bank Loan

Bank loans are generally secured debts, which means they require some form of collateral. In the event you fail to pay, the bank can take possession of the item you secured. (Bankruptcies do not clear secured debts.) Also, bank loans will still charge you for the interest owed and agreed upon even if you choose to repay in full at an earlier date.

A Third Option

Another option worth considering is a personal line of credit from a bank, which is the cross between the credit card and bank loan options. Like credit cards, it's a revolving line of unsecured credit, always available for you to use as needed, but like a bank loan, it comes with lower interest rates that does not change over the life of the line of credit.

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