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Loan or Credit: What’s the Best Way to Make a Big Purchase?

Whether it’s a new home, car, family vacation, or something else entirely, big purchases involve a lot of planning and thought. And if you’re ready for the buy, you’ve certainly researched your options and made a decision. But you may be stuck deciding how to pay for it. Before you make the purchase, consider your payment options. Some ways of paying can be better suited to your needs than others.
 
Loans and credit are similar in that they both allow you to borrow the money you need. However, there are major differences between the two. When buying a large purchase, you probably want to know which one is easier and will save you the most money. However, there is no set guide to which one you should use. Both loans and credit will come in handy, but it is important to research which one is best for you. Take a look at the list of pros and cons below to recognize the differences and make an educated decision. 
 

Credit

When you use credit, you have a line of available credit that you can tap into at will. Depending on how high your credit limit is, you can buy a lot without having available cash. You use your credit card to buy the purchase, and you then pay the lender back when your bill comes. Your monthly statement will include a minimum payment which you must pay each month. You will then get charged interest until you pay back your purchase in full.
 
Pros of Using Credit:
  • You have the flexibility to access money even when your monthly income fluctuates. 
  • You only have to pay interest if you have an outstanding balance.
  • It is simple to use and it can be easier to get approved for credit than loans.
 
Cons of Using Credit
  • With credit, you have the ability to overspend and get more into debt.
  • Credit cards can have high interest rates and high charges if you do not pay the purchase back in time.
  • There can be extra fees involved: annual fee, penalty fee, foreign transaction fees, etc…

Loans

A loan, unlike credit, involves a fixed amount of money. You borrow a set amount, and you repay it in fixed monthly installments over a certain period of time. Once you are approved for a loan, you receive the entire amount of the loan upfront, you use the money, and you are then expected to pay back the money you used plus interest until it is repaid in full.
 
Pros of Using Loans:
  • You get the money you need at once, so you can buy the large purchase and not have to worry about paying it back within the month.
  • Loans can have lower interest rates than credit cards.
  • It is more effective to consolidate your debt by just having a loan, not a lot of credit card balances.
 
Cons of Using Loans:
  • It can be much harder to get approved for a loan than a credit card.
  • Loans are a fixed amount of money, so you cannot borrow more even if you need it.
  • Unlike credit, you always have to pay interest on the loan. So, you may end up spending a lot more than the loan originally was.
 
Overall, there are both good and bad things about credit and loans. It is important to consider your purchase, as well as your financial standing, when deciding which one you should use. And as always, read the terms and conditions of your credit card or loan before you get locked into a something you don’t want.

 

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Alice Bryant's picture

Alice Bryant is the Editor of Creditnet and a personal finance expert with over a decade of experience writing about credit cards, credit scores, debt repair, and more.

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