A consideration of bank loan versus interest rate on your credit cards would not have occurred to our grandparents when they need to make a major purchase.
A major appliance would be purchased with cash saved up for the purpose or terms arrange with the store selling the item to allow payment over a two or three month period.
Those arrangements were common in small towns across the country where bankers and store owners knew other residents and knew their reputation for paying their bills.
For an expensive purchase, the buyers would visit is local bank and take out a personal loan. This could be done in as little as an hour as the loan decision was based on the reputation of the applicant and the value of the product being purchased.
Short term personal bank loans were common for our Grandparents but those loans have almost disappeared as banks have merged and been bought out and as the use of credit has become both more accepted and automated.
You may still qualify for a $3000 loan to buy a used piano but it will involve filling out a long loan application. The bank will check your credit report and an underwriter will score your application and recommend it be approved or denied.
The Applying Process
The process will take at least two days and perhaps more before you know if you can buy that piano or not. In the past few years we’ve become perhaps too comfortable with using credit cards for everything we buy.
We live at a faster pace today. Technology is wonderful but the products now available to inform us, amuse us and help us keep in touch also result in time spent each day as we try to keep up with all the wonderful options we have.
If you have a credit card with an interest rate of 9.9% APR and several thousands dollars of spending limit available, it may seem easier to charge a large item.
Why waste your time filling out applications and waiting for approval to buy that $3000 piano when you can just present your credit card and arrange for delivery within a few minutes?
This thinking has led many consumers into excessive credit debt in recent years. In part, this is due to the changing economy which has led to changes in credit card terms. For the most part, it’s due to consumers who opt for the fast and easy method without closely looking at the finances involved.
Advantages
Most credit cards today have variable rates of interest. This may not be a problem unless or until there is a big change in the country’s economy. However, there are also changes in interest rates that can occur if you miss a payment or make a payment late to your credit card account.
If you have a fixed rate of interest on your card, the consideration of “loan versus card interest” will depend on your discipline in paying off the credit card charge at the same rate of payment a bank would require.
A bank will make a loan over a specified period of months or years and will provide you with a fixed payment that must be made each month. Credit card lenders have sliding payments with a minimum payment due that is often 1% of your balance of debt plus the finance fees of the past 30 days.
If you choose to make your purchase with a credit card and pay only the minimum payment required each month, you will pay a far higher amount of interest for the purchase.
Disadvantages
Once you have obtained a bank loan, you know exactly what you will pay each month and how much you will pay in total for the sum you borrowed.
The only change might be a late fee if you do not make payments on time. Whether your bank loan is for a term of 2 years or 15 years, you know the costs at the time you obtain the loan.
Credit cards can change drastically both in interest rates charged and in terms and conditions. Although your lender cannot change the interest rate on your new credit card for the first year, he can charge a high penalty APR if you miss a payment. The penalty can be applied even for a payment that is one hour late for a single month.
There is uncertainty in the credit lending market. Your interest rate is a variable rate and can change based on market conditions. A few lenders such as Chase provide online tools for management of your credit account.
You can choose to apply a certain amount of your monthly payment toward one specific item and that provides some protection against paying addition interest for a large purchase.
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Summary
If you have a new credit card with an extended 0% introductory rate, using credit for a big item may be a smart move if you are certain you can pay off the item before the special rate expires.
Your decision should be based on total interest to be paid, on the stability of your finances and on your self discipline based on past experience. For most large purchases, a bank loan is a better option that carries less risk of excessive interest charges.
