Payday Loans vs Credit Cards: Differences, Costs, Pros and Cons

Payday Loans vs Credit Cards Differences, Costs, Pros and Cons

Probably, you’ve ever found yourself in an emergency situation and were desperate for some cash. The two common options for short-term money relief are, a credit card cash advance and a payday loan. But how exactly do they work? How are they different? How do I know which one is best for me? Let’s find it out!

What is a Credit Card Cash Advance?

When you use a credit card cash advance, you’re actually borrowing cash against the credit limit on your credit card. Do not confuse it with a regular credit card purchase, however. First of all, your credit card cash advance limit is not your total credit card limit, but sooner somewhere in between your available balance and your full credit limit. In addition, the credit card usually comes with a grace period for purchases, which means you have some time to repay your credit card debt before interest will accrue. But a credit card cash advance usually starts to accumulate interest immediately. This difference can be quite significant, as the interest rates for a credit card cash advance can be much higher than the interest rate for usual purchases on your credit card. To apply for a credit card cash advance, you’ll need:

  1. Be at least 18 years old (sometimes 21)
  2. Have a credit card;
  3. Know a PIN associated with your credit account (if using an ATM);
  4. Find an ATM or bank associated with your account.

If you’re searching for a cash advance online in Illinois, there are many options to choose from.

What Is a Payday Loan?

A payday loan is a short-term loan that typically do not exceed $1,000 (some lenders are ready to lend up to $5,000). It is typically paid back in a lump sum at the time of your next pay. Payday loans are unsecured, which means you don’t need to provide any collateral to borrow the money, and interest is typically calculated as a flat-rate fee up front. Payday loans for bad credit usually come with high interest rates compared to traditional personal loans, but lenders are willing to work with retired, disabled, unemployed, self-employed, and even with people who have bad credit scores. To apply for a payday loan in Illinois, you’ll need to:

  1. Be at least 18 years old;
  2. Have an active bank account in your name;
  3. Have a government-issued ID;
  4. Have a source of permanent income.

Payday loans are available in-store or online through a few simple steps.

Credit Cards or Payday Loans: What Is the Difference?

It is not always convenient to borrow from relatives or friends. In some situations, it is easier to use a credit card cash advance or a payday loan. What is the best option for you? Let’s compare these two popular products.

1. Speed of application and money transfer

To get a payday loan online and a credit card, you need to provide proof of identity. However, often banks additionally ask for proof of employment and stable income and issue a card within two weeks. Find the best online lenders that process applications within a few minutes. Often, you can receive the funds as soon as the same day.

2. Verification of the borrower

Before issuing a credit card, banks check the borrower’s employment, income size and stability, work experience, place of residence, etc. As a rule, getting a payday loan is easier than a credit card, since the entire process involves no credit checks, and official employment is not required.

3. Available loan amounts

According to a recent report by Experian, the 2022 average credit limit for Americans across all credit cards was $30,000. However, individual credit card limits can be as low as $300 depending on the applicant’s age, employment status and credit history. When applying for a payday loan, you need to be prepared for the fact that the maximum amount you can borrow is $1,000 (sometimes up to $5,000). But this debt will be easy to repay as soon as you receive your next paycheck.

4. Loan term

Credit card cash advances are usually paid off within six months to two years. The maximum term is set by the bank individually. Payday loans are typically repaid within 31 days.

5. Interest rate

For credit cards, the interest rates are typically stated as a yearly rate. This is called the annual percentage rate (APR). They depend on the chosen bank and the approved credit limit. The average interest rate on a credit card is 14.51%, according to the Federal Reserve’s data. Payday loans for bad credit typically cost 400% annual interest (APR) or more. The finance charge ranges from $15 to $30 to borrow $100.

6. Commissions

A credit card annual fee is a price that you’re required to pay every year to remain a cardholder and enjoy the card’s rewards and benefits. Most annual fees range from $25 to $450. Not all cards charge an annual fee, and some cards waive it the first year. The commission is also charged for cash withdrawals and money transfers to cards of other banks, and most often you also have to pay for reissuing a card. The insurance services offered by the bank are additionally paid. Payday loans involve no such commissions.

7. Grace period

When using a credit card, there is a so-called grace period during which no interest is charged on the loan, and you can return the amount that you borrowed. This is not the case with payday loans. However, microfinance organizations often offer interest-free loans for first-time customers and hold attractive promotions.

8. Restrictions on use

When applying for a payday loan online, you can choose a convenient way to receive funds – to your personal bank account or in cash. There is no choice when using a credit card. This is not always convenient, especially since debit and credit cards are different in use. For example, you will not be able to pay for a purchase in a foreign online store that works with the PayPal payment system due to restrictions on linking credit cards to it.

Payday Loans vs Credit Cards: How Do I Know What’s Right for Me?

Who is eligible for a credit card, and who qualifies for a payday loan? Which product suits me most? Let’s figure it out together.

Here’s how a credit card works:

  • It is a universal payment instrument with a revolving limit. Approved once, it will last the rest of its life.
  • If you repay the debt within the grace period, you will pay no interest.

Important: Credit card cash withdrawals can be done at ATMs of any bank irrespective of the credit card issuing bank. However, some banks in Illinois may charge a different cash advance fee for withdrawing cash using other bank ATMs.

Here are some benefits of a payday loan:

  • Speedy funding. You won’t have to wait for approval and funding for days. You can typically have the money in your bank account the same day.
  • You can use the money for whatever needs: medical bills, car repairs, home improvement, vacation, business expenses, tuition costs, and even Christmas expenses.
  • You can apply online. Online lenders offer favorable conditions to reliable clients who fulfill their obligations responsibly.

It is not difficult to choose the right product for a particular situation. Rely on the main points described the article, study the terms and conditions set by banks and microfinance institutions and avoid unprofitable offers.

3 Tips to Make Loans More Profitable

Our experts have found several solutions to help make borrowing more profitable. We recommend:

  • Look for promotions and special offers from banks and online lenders;
  • Always repay the loan on time and participate in the loyalty program. Many companies have discounts on credit products for repeat customers;
  • Borrow funds only for a definite purpose that will bring income or save money.

Best Alternatives to Payday Loans and Credit Cards to Consider

  • Local nonprofits and charities. You may get free help to cover essential expenses. Local funding sources, such as community centers and nonprofits, are especially helpful if you have difficulty paying for groceries, gas, medical treatment and other essential expenses. But charitable organizations may ask you to provide proof that you really need help, like recent pay stubs.
  • Medical bill assistance. You may get help in paying a large medical bill. There are various ways to manage medical bills that you can try: extended payment plans, medical bill advocates, and medical credit cards.
  • Bad credit loans. You can still borrow cash with a credit score below 690. Some online lenders advertise their products as no credit check loans. they may approve consumers with high debt-to-income ratios and low credit scores. Many online lenders offer instant funding and can deposit the funds into your bank account within 24 hours of approval.
  • Credit union loans. If you’re a credit union member, you may qualify for payday alternative loans. You can borrow a small amount — typically up to $1,000 or $2,000 — with a low interest rate and flexible repayment terms. Large credit unions may be able to process your request and fund you within a couple of days. This option is only available for consumers with good credit scores.
  • Payment plans for monthly expenses. You may ask for a payment extension or installment plan from your landlord, utility company or mortgage lender to temporarily reduce those expenses while you cover another, more urgent expense.
  • Other ways to make money. You can make some extra cash by selling your clothes, walking with dogs, taking online surveys, becoming a virtual tutor, etc. Some of the options in this guide to making cash fast take longer than others.
  • Lending circles. You should have a stable source of income in order to contribute to the lending circle fund on a regular basis. A lending circle is a group of people who pitch in to lend each other money at low or no cost. They’re also known as rotational savings.
  • Family loans. You can borrow money from your friends or family without interest. A loan from a close person doesn’t require collateral but you could be putting a relationship at risk, so be sure you will be able to pay back the loan on time before you borrow.
  • Cash advance apps. If you are employed and need a paycheck advance, you can use a cash advance app. They are quick and easy; you just have to submit some information and get approved within minutes. You can usually get an advance between $20 and $500 on your next paycheck. Such apps typically charge low fees, but most request a voluntary tip for the service.
  • Pawn loans. You can go to a pawn shop to get cash without a credit check and without having to sell a valuable item. To borrow cash from a pawnshop, you provide an item as collateral – such as jewelry, a TV or a watch – and the pawnshop gives you a loan based on its appraised value. A pawnshop will tell you on the spot whether they will give you money and how much. Interest rates and finance charges for pawn shop loans are often high. Another downside is that if you don’t pay off your loan on time, the pawn shop can sell your item.

Frequently Asked Questions

Are credit cards cheaper than payday loans?

Taking out a credit card is usually cheaper than getting a payday loan. However, there are some nuances to keep in mind. The best choice is based on your individual needs.

Is a cash advance good or bad?

A cash advance offers fast cash, but the costs can quickly add up. The most profitable way to use a cash advance is to repay the money as quickly as possible. It could be a good solution for people who know they will pay it off in a few days and won’t have to pay much interest.

Is a payday loan good or bad?

Payday loans can be a very attractive option because they offer instant cash to people with bad credit scores, but sometimes they aggravate money problems. It’s ideal to pay it off right away. Payday loans are not meant to be long-term solutions.

Is a personal loan a better alternative to a payday loan?

Generally, a personal loan will be cheaper than a payday loan. Personal loans give a borrower more time to repay a loan, and most credit unions offer personal loans with low APRs comparable to those of bad credit credit cards.

What are the costs of a credit card?

Annual fees range from $30 to $500, depending on the credit card you opt for. Higher annual fees are charged on credit cards for bad credit and premium credit cards for people with exceptional credit.

What are the costs of a payday loan?

Payday loans usually charge $10 to $30 for every $100 borrowed, depending on your state law and the maximum amount your state permits you to borrow. In Illinois, finance charges should not exceed 15.5% per $100 borrowed.

What are some risks and benefits of a credit card?

Credit cards offer benefits such as fraud protection and cash-back rewards. But if mismanage credit cards, they can lead to debt, interest charges and damage to your credit.

What are the pros and cons of a payday loan?

The key benefits of payday loans are: they’re easy to access, have fewer requirements than other loans, don’t check your credit, and they are unsecured. The downsides are: they’re expensive, considered predatory, and it’s easy to get trapped in a debt cycle.

Category: General

Tags: cash advance, credit card, finance, money, payday loans