Credit cards are a popular form of credit, but not many know about Line of Credit or Short Term Loans and don’t use them either. A credit line, a short-term loan, and a credit card are all unsecured lending instruments, meaning that no collateral or security is required to use credit through any of them. Let’s explore the pros and cons of each of these three credit methods to help you find the right one for your needs. 

Individuals get some kind of loan at some point in their life. It could be to meet some life contingency, a medical emergency, to build and run their business, or to fulfill their life aspirations. Credits are of different types. Most popular of these are: 

  • Term Loans or Installment Loans
  • Credit Cards
  • Line Of Credit

Consumers and households seeking to manage their cash flow can select from a variety of accessible no-collateral lending alternatives. They can utilize their credit card or take out a short-term loan to manage income for a variety of reasons, such as debt consolidation, emergency expenses, and house repairs, among others.

Credit Line vs Credit Card vs Short-Term Loans

Credit Lines

Credit Cards 

Short Term Loans

A credit line is a type of unsecured loan that allows you to borrow a little to medium amount of money, ranging from Rs.5,000 to Rs.2,00,000 or even more in some situations. It's a one-of-a-kind credit product that allows borrowers to take out a loan and utilize the funds as needed, paying interest only on the capital utilized rather than the total amount available. When the borrower repays the monthly instalment or EMI on the amount borrowed, the whole credit line becomes available for usage once more.

A credit card is a bank-issued plastic card that you may use to make purchases and pay interest on the amount of credit you have used up to a certain limit. You are charged monthly for the credit you have used, and if you do not pay the card amount or bill within the specified time frame, you will be charged interest on the credit you have used.

Short-term loans are given out in lump sums, and you must begin paying interest on the whole amount borrowed starting from the day the loan is taken out. The usual loan term is less than three years, although it can be as long as five years in exceptional cases. The payback is usually collected monthly, and the financing organization, whether it is a bank or another institution, charges you penalty if you pay off your loan early.

 

Credit cards offer a wonderful opportunity to extend payments on purchases of goods and services without incurring any interest or charges, as long as the credit card balance is paid on time.

Short-term loans are another well-known method of obtaining credit, but borrowers must pay EMIs on time, which involve a significant amount of interest in the initial phase of the payback period.

While most people are aware of credit cards and term loans, very few are aware that individuals can also obtain a credit line or line of credit.

Accessibility

  • Credit Lines are less accessed due to a lack of awareness of this particular product
  • Credit cards have strict eligibility criteria making them inaccessible to low-income earners
  • Short term loans are available only to disciplined repayers who have already repaid their last loan

Credit cards can be risky at times, especially if you don't pay your bill on time or just pay the minimum amount due, resulting in the unpaid balance being carried over to the next month, coupled with a high-interest rate. Aside from that, credit card fraud and theft are a possibility. 

Short-term personal loans, on the other hand, typically have larger borrowing limits than credit cards. The interest rates on these loans, however, are cheap only if you have a decent credit score. There are other disadvantages, such as prepayment penalties and the fact that you will end up paying nearly twice the amount borrowed in interest.

Pros & Cons of Credit Line vs Credit Card vs Short-Term Loans

 

PROS

CONS

Credit Line
  • Borrow only what you require.
  • Interest is only charged on borrowed funds; flexible repayment options are available.
  • Continuous credit access.
  • APR is lower than credit cards on average.
  • Providing collateral in exchange for lower interest rates is one option.
  • Few limits on use Ideal for long-term projects with a wide range of ultimate costs.
  • Ideal for addressing short-term cash shortages.
  • You have the ability to withdraw up to 100% of your credit limit without any limits.
  • Interest expenditure that is not deductible.
  • When interest rates rise, so does the variable rate on the line of credit.
  • Regardless of usage, there are annual/monthly maintenance expenses.
  • Rates are higher than fixed-rate loans, making them unsuitable for debt consolidation.
  • It may be more difficult to predict the amount of interest charged.
  • Fees/APRs vary greatly depending on the supplier; often, an account with the lending institution is required.
  • To qualify, you must have a decent credit score.
  • For long-term monetary shortages, this is a poor option.
  • Due to the ease of access, there is a temptation to spend.
  • A persistently large balance might have a negative impact on your credit score.

Credit Cards
  • Smaller expenditures that may be paid via online transactions are preferable. Most credit cards come with an interest-free payment term of 30–50 days, so there is no fee.
  • Because this is a revolving line of credit, it may be utilized repeatedly.
  • Most credit cards also give incentives on purchases that may be redeemed for cash back, gift cards, and other benefits.
  • It's always a good idea to keep a credit card on hand in case of an unexpected expenditure.
  • With a strong payback history, credit card limits are automatically increased, which is useful in the long run.
  • Most credit cards don’t allow cash withdrawals or charge very hefty fees for the same.
  • Difficult to control the urge to spend and go overleveraged with a credit card which might lead to repayment issues in future.
  • Interest rates on credit cards are very high, typically 36-42%, which makes them extremely expensive if your dues are not paid on time.

Short-term Loans
  • For expenses that must be paid in cash or in one lump payment, this option is preferable.
  • The amount borrowed and the time it takes to repay it are both restricted and capped, preventing unforeseen and unexpected expenditure (unlike a credit card).
  • Because credit cards are considered high risk by banks and other lenders, you may often acquire a greater loan amount than a credit card limit (even for the same borrower profile).
  • Unlike a credit card, which has a monthly billing cycle and so makes your cash withdrawals more balanced, repayments are spread out over a longer period of time (such as 3 to 12 months).
  • Extremely short-term loans (less than 90 days) should be avoided because they are extremely expensive and can trap you in debt.
  • The loan is a one-time solution, which means you must reapply for a loan and qualify each time you desire additional funds.
  • When you don't have enough money to pay your credit card account in full, you can choose the 'minimum payment' option. If you take out a loan, you must pay the equivalent monthly income (EMI).
  • The consumer's credit score is improved by timely repayment of the loan amount.

 

EndNote

It's important to remember that borrowing is always a serious affair and that repayment commitments must be met. As a result, you should strive to develop sound financial habits that help you balance your immediate demands with your long-term earning potential.

FAQs: 

  1. Which loan is best for my business needs?

If you want to meet your daily business expenses, short term loans will be handy. You can also get a business credit card. 

  1. Are credit lines available for individuals too?

Yes, in recent times, banking has evolved to give credit lines to individuals too. 

  1. Is it advisable to get a short term loan to pay for medical emergencies?

They might be a good option. However, they come with a very short repayment period, of around 90 days, and if you fail to pay it back, you will be charged steep penalties and incur high interest rates. Personal loans can come in handy for medical emergencies. 

  1. Which one is the easiest to get? A credit line, credit card or short-term loans?

Credit cards are the easiest to get as they are based on your income. And, you can even apply for a credit card online using your internet banking account without having to visit the bank branch. 

  1. Which of these comes with the best interest rates? A credit line, credit card or short-term loans?

All three types of loans are unsecured loans and hence come with high interest rates compared to secured loans like car loans or home loans. The average interest rate on these loans ranges between 25- 40%.