You may find yourself in a situation where you have no choice but to borrow money. It could be for a variety of reasons, including a shortage of resources or monetary liquidity at the time, or simply because you require a huge sum of money urgently.
Many people believe that borrowing money is not a wise financial decision. This isn't always the case, though. Borrowing, when done correctly and for the right reasons, can help you start a business, support your child's education, purchase the home of your dreams, and improve your overall quality of life. However, if it is used incorrectly, it might lead to a debt trap.As a result, while some debt is unavoidable, others can be catastrophic to your financial well-being. As a result, debt management requires caution and discipline.
Most borrowers prefer a credit card or an overdraft loan over the many various types of credit facilities offered. Both of these credit options have a higher interest rate on the principal amount borrowed or used. Which one is most appropriate for you? It largely relies on your specific requirements.
Some may be perplexed as to how an overdraft loan can compete with the multiple benefits supplied by a credit card. Personal overdraft, on the other hand, is a highly beneficial line of credit option for the majority of paid workers because its benefits are very similar to those of a credit card loan. Let us see if we can better grasp which choice is best to borrow money by comparing the options:
Personal credit lines, such as overdrafts and credit card loans, provide you with advance funds that must be repaid, most certainly with interest. Various variables influence one's decision to use an overdraft or credit card.
When deciding between a credit card and an overdraft loan, there are several aspects to consider:
Ask yourself these questions and then figure out which choice will save you money.
Credit Cards Loan
Due to their widespread use in today's environment, credit cards require no introduction. They've become a convenient alternative to carrying cash. Credit cards are amazing tools for managing one's finances because they allow us to pay for goods quickly while also providing wonderful benefits. They have made our daily transactions more efficient and enjoyable.
Cardholders can access credit up to their pre-approved limit during the interest-free or grace period offered as a welcome benefit with credit cards. After this time period has passed, the outstanding balance is subject to a monthly interest rate.
Credit card loans are thus a part of our monthly bill repayments, and the rate of interest charged is far more important than the annual fees or other ancillary costs that attract the majority of cardholders who wish to get a credit card or who are already using one. If not properly managed, this interest will essentially make credit card ownership an expensive affair.
What is the procedure for taking out a credit card loan?
Credit cards can also be used to obtain a credit line. It's a revolving credit line, which means it's more flexible than a fixed-term loan.This credit card loan might be as large as your issuers' allowed credit limit. This means it can be as large as the maximum amount you can put on your credit card.
When you use a credit card to purchase goods and services, you are borrowing money from the credit card company. You must refund that borrowed sum that was granted in advance at the conclusion of the month. If, on the other hand, you borrow money using your credit card and are unable to repay it in full, this becomes your monthly outstanding debt. This balance will also be subject to interest, which may vary depending on the type of credit card and your credit score.
If a credit card user is unable to pay the whole amount due at the end of the cycle, they have two choices. They have the option of paying the full amount owed plus interest, or they can pay a minimal amount that is primarily the interest portion of the bill. If people make a habit of paying the minimum amount due each month while using their card, the total outstanding balance, plus interest, grows dramatically.
It's now more important than ever to keep your Credit Utilization Ratio steady, which should be at 30% or less of your total credit limit.
Overdraft Loan
This is a type of loan or line of credit that allows borrowers to make partial withdrawals. This loan is pulled from a pre-approved credit limit, and the borrower is responsible for paying a monthly interest charge. For example, if the approved credit limit is AED 100,000 and the borrower only wants to utilise AED 30,000 of it, they will withdraw that amount and pay a monthly interest rate on it.
One might be compelled to inquire as to why this is beneficial. The rate of interest holds the key. In comparison to the interest rate imposed on credit cards, an overdraft loan for paid professionals’ costs approximately half as much. In comparison to credit cards, taking out an overdraft loan allows you to develop a greater sense of financial discipline. This is due to the fact that interest is paid in monthly instalments, however the withdrawn funds can be refunded at any moment without incurring any further fees.
What is an overdraft and how does it work?
Those who have an overdraft protection plan with their banks are able to spend more than the amount in their linked checking account. The check would not bounce as it usually does if you did this. Their bank, on the other hand, will have to honour it by advancing the funds. They will have to pay the bank interest on the amount overdrawn from the account in exchange for this service.
Some lines of credit that offer overdraft loans incur a cost for each overdraft, while others levy an annual cost instead of or in addition to the overdraft penalties. Because an overdraft is effectively a personal line of credit, the bank will only allow you borrow the money if you have good credit, subject to the bank's restrictions.
Aside from that, the interest rate paid on an overdraft facility is only relevant for the number of days the money is used and only for the cash withdrawn.
Advantages & Disadvantages of Credit Card Loan and Overdraft Loan
Below is a quick comparison of the two to further highlight their distinct benefits and drawbacks:
For example, your car requires AED 1,200 in repairs, but you now have only AED 200 in your account. You give the garage a cheque for AED 1,200. Your bank's overdraft loan will allow you to borrow AED 1,200 at an annual interest rate of, say, 18%. You'll also have to pay a fee of AED 12.50 for an overdraft. You will have to spend AED 216 in interest and AED 12.50 in overdraft fees in order to repay this loan in one year.
A credit card, on the other hand, allows you to borrow the money for a year at a discounted rate of 12 percent yearly interest. If the card has no annual fee, you will just have to pay AED 144 in interest.
In this case, using a credit card is the best option. However, if the credit card has a higher APR (Annual Percentage Rate), an annual fee, or both, an overdraft loan would be the obvious decision.
Things to Keep in Mind If You Prefer a Credit Card to an Overdraft
- Choose a credit card that corresponds to the way you want to borrow money-
- Go for 0% balance transfer cards if you wish to borrow to pay off another credit card.
- If you need to borrow money to stretch the expense of a significant purchase, look for a 0% purchase credit card.
- If you need cash, a 0% money transfer card is the way to go.
Things to Keep in Mind If You Prefer an Overdraft Loan to a Credit Card
- The line of credit is granted on the basis of pre-approved loans secured by assets such as FDs, bonds, and other securities.
- The rate of interest charged will be determined by the asset given as collateral.
- The amount of money you can borrow will be determined by the item you put up as security.
- Any negative balance must be paid back within one month.
Conclusion
Both facilities have their own set of advantages and disadvantages. If you have pre-planned expenses, credit card loans are preferable, but overdrafts might be handy in an emergency. By using overdrafts, you can avoid the embarrassment of a bounced check due to inadequate cash. Regardless, both lines of credit have penalty APRs, which means that if you miss a payment, your interest will skyrocket. So, regardless of the option you choose, be careful to make your payments on time.
