Small loans and credit cards are entirely different, although both types of credit require you to pay interest in addition to the borrowing amount.
What are small loans?
Small loans are unsecured loans, meaning they are not subject to collateral. A risk of losing your house or another valuable does not have to be borne in case of default, although it is subject to certain consequences, such as damage to your credit score and a debt spiral.
Small loans in Ireland can be employed for a variety of reasons: unexpected and planned. When they are applied for small emergencies, they are required to be discharged in one fell swoop. However, larger loans are required to be settled over an extended period of time. The maximum repayment length of small loans could be up to five years.
Types of small loans
Here are the types of small loans:
| Loans | Description |
| Same day loans |
|
| Bad credit loans |
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| Personal loans |
|
What are credit cards?
Credit cards also allow you to purchase things when you are short of cash, but credit card bills are paid back in full on the due date. Unlike loans, you do not have to apply for a credit card every time you need money.
Once you have got it issued, it will come with a certain limit, which is decided after perusing your overall financial condition and credit score. The better the score and the stronger your financial condition is, the higher the credit card limit will be.
After you make a credit card purchase, a bill will be generated. You will be given a specific period within which you are obligated to pay off your credit card bill in full. This is called a grace period. If you fail to settle the whole account within the given timeframe, you will be charged high interest rates. Interest rates are charged by the day.
What are the merits and demerits of small loans?
Here are the pros and cons of small loans:
| Pros | Cons |
| The greatest benefit of these loans is that they come with quick disbursal. You will get funds almost the same day. | Interest rates for short-term loans are high. They could be even higher when your credit rating is not stellar. Personal loans are also expensive, as lenders bear a greater risk of losing their money in case you default. |
| When the borrowed amount is small, you will have to pay off the whole debt in one go, so there is no risk of tying yourself to debt payments for a long period of time. | Small loans charge processing fees, which could be between 1% and 5%, depending on the policy of a lender. In addition, you will also have to pay late payment charges if you miss a repayment. |
| When the loan amount is to be paid down in fixed instalments, you can easily budget around payments. | The risk of accumulated debt is very high, whether you rely on short-term, high-cost debt or personal loans. If you fail to pay off your obligation on time, late payment fees and interest penalties will be charged, which will increase the debt size. |
| Borrowers with a fair credit history can choose flexible repayments. Some lenders may allow you to choose a longer repayment term if your finances are not strong. | Small loans can also impair your credit score if you do not pay them off. Bad credit histories will reduce your chances of borrowing money at affordable interest rates. |
| No collateral is required. If you make a default, you do not have a risk of losing your house in case of falling behind on payments. | When hard credit inquiries are run, you will see a temporary drop in your credit rating. These inquiries will remain on your credit score for two years. They will continue to affect your credit score. |
What are the upsides and downsides of credit cards?
Here are the advantages and drawbacks of credit cards:
| Pros | Cons |
| Responsibly settlement of credit card bills will help you build credit. This will improve your chances of borrowing money at affordable interest rates down the line. | Interest rates are very high. Carrying a small balance every month can throw you into credit card debt. |
| You can earn rewards and cashback as long as you pay off the balance in full. | Convenience comes along the risk of falling into debt, as you can overspend losing the track of spending. |
| They are more secured than debit cards. | An increased credit utilisation ratio can affect a credit score. |
| Credit cards provide convenience. They can help you purchase a big-ticket item when you are short of cash. | Credit cards charge annual fees and late payment fees when you do not clear the balance on time. |
| They provide interest-free borrowing as long as you pay off the balance in full on time. | You can impair your budget by excessively relying on credit cards for purchases rather than cash. |
The final word
Small loans and credit cards are both used to pay for funding short-term expenses. They both have their own pros and cons. You should carefully consider them and analyse which one is better in a particular situation.
