When it comes to borrowing, knowing which type of credit to use can be difficult, especially if you have a bad credit history or a low credit score and your borrowing options are limited. Payday loans and credit lines offer two different ways to borrow, from needing cash urgently to general cashflow management.
It’s not always easy to compare different products, so read below for a brief summary of both credit lines and payday loans, and why each product might be a suitable borrowing option.
A credit line exists to help people manage their cashflow when they require more frequent assistance than short term loans can offer. With a credit line, your available credit is accessed through an online account, so you have to manually withdraw the funds into your own bank account. This means you can’t accidentally spend the credit and the process of withdrawing the cash gives you a little extra time to consider the reasons for your borrowing and assess your ability to repay the balance. A credit line requires only a minimum payment at the end of your statement period, so if you can’t afford to repay the full balance or a significant chunk of it every month, then you don’t need to stress about your budget or compromise other financial commitments. Credit lines are online credit services with online applications, meaning you can apply quickly, and if your application is approved, you can access the funds on the same day, so they still have the same speedy nature that payday loans possess.
Instant payday loans have been around since the late eighties, but they’ve changed quite considerably since then. The common features of modern payday loans include:
Payday loans are a type of high cost lending, but as they’re designed for short term use, they’re often not as costly as people first assume. Payday loans are capped at 80p per day per £100 borrowed so if you only need to borrow a small amount of cash for a short period of time, they’re a quick and easy way to do so. Payday loans should only be used occasionally and when the need to borrow is urgent, not if you can wait until you’re next paid. Instalment loans evolved from payday loans, the only difference being you repay in multiple instalments over several months, instead of in one lump sum on your next payday. This can help reduce the immediate financial impact of repayment and can help you manage your money more effectively.
Credit lines and payday loans are fundamentally different, though they share some of the same features. It therefore depends on your particular circumstances and why you need to borrow to determine whether a credit line or a payday loan would be better for you.
It can be easy to assume a lower interest rate credit product is always better, but if you know you’re often tempted to spend outside your means or you do so accidentally, then having access to revolving credit can encourage poor spending habits making money management harder. Compared to a personal line of credit loans can be another option, but payday loans are an expensive way to borrow so if you find you need financial help a few times throughout the year, it would probably be cheaper to use a credit line.
In addition, you might want to consider whether you need to borrow for a short period or for more long term use. If you rarely need credit, then short term loans might be more sensible as they have static repayment amounts and it’s very clear how long they take to repay and how much they will cost. With credit lines, you only need to make a minimum payment which can help if you have a flexible income, but it will take you longer to repay if you only make the minimum payment. You also only need to make one application, and then you can borrow as much and as many times as you need to (within your credit limit), whereas payday loans require a new application each time you want to borrow.
There are a lot of factors to consider, and without knowing your personal circumstances, it would be near impossible for a third party to advise the right loan or credit service. It’s important whenever you are looking to borrow when you need cash quickly, that you don’t jump to credit as a first option. It’s always better to accommodate unexpected expenses from money you’ve earned or saved rather than money you’ve borrowed, which is why it’s important to budget sustainably and build up a rainy day fund – even if it takes a few months or years to achieve. Credit can help you manage your money as long as you’re not dependant on it, and where you have healthy financial habits in place to assist you.
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