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Payday Loans

Payday loan or revolving credit: which one should you choose?

 

 

A loan is considered a small loan, especially when compared to a mortgage of several tens of thousands of dollars minimum. For a credit of this amount, the bank will systematically offer the future borrower a consumer credit offer, with a choice of payday loan or revolving credit. She can also only submit a payday loan offer.

On the other hand, for a loan of more than 1,000 dollars, an amortizable loan proposal must accompany the offer of revolving credit. This allows the borrower to compare these two types of credits. What to choose between them to reduce the cost of their credit? How to find the best loan contract? So many questions to which we will answer in this article!

Payday loan vs revolving credit

Personal loan vs revolving credit

A credit still represents a sum. Whatever the project envisaged (car, household appliance, travel, etc.), it is therefore normal for the borrower to wonder about the characteristics of the credits offered to him. First, let’s start with the main similarities between these two credits …

As consumer credit, neither is linked to a specific purchase. The borrower can use the loan amount to finance the project of his choice (excluding real estate), without having to provide proof of purchase. Then, for a payday loan as for a revolving credit, the borrower obtains a rapid response from the bank. The processing time for a consumer credit file is indeed shorter than for a mortgage, for example. The amount of money at stake is not the same! But in any case, the bank will study the situation of the borrower to ensure that he will be able to repay the loan. Finally, whether in a payday loan contract or in a revolving credit contract, borrower insurance can be included. This insurance is not compulsory. If the bank nevertheless requires it and submits an insurance proposal to the borrower,

At the level of differences, things get tough. Below, the most notable.

Operating mode

  • Sum of money defined and paid at once for the payday loan.
  • Reserve of money usable at will for the revolving credit (within the limit of the ceiling).

Rate

  • Variable or fixed rate (that is, the same for the duration of the loan) for the payday loan, and generally affordable.
  • Variable rate exclusively for revolving credit, and often very high.

Duration and total amount of the loan

  • Duration and amount fixed in advance in a payday loan contract.
  • Uncertain duration and amount for revolving credit (the duration becomes longer and the amount increases as the borrower uses his reserve of money).

Monthly payment

  • Same monthly payment for the entire repayment period for the payday loan;
  • Variable monthly payment depending on the use made of the money reserve (see duration and amount of the credit).

Revolving credit: is it possible to buy back?

Revolving credit: is it possible to buy back?

In view of the excessive rates presented by revolving credit and the risks of over-indebtedness that result, the borrower can make the (reasonable) choice to terminate his consumer credit contract. The good news is that, as with all consumer loans, revolving credit is eligible for credit redemption.

This redemption must report to at least two consumer loans. The opportunity for the borrower to review the rate of his current loan – and therefore the total cost of his loan – drastically downward, while backing the loan he needs to carry out his car project, for example.

Note: non-existent refund penalties
Revolving credit is the only consumer credit for which no repayment penalty applies (this may be the case for other consumer credits, but it is at the discretion of the bank). In order to escape the astronomical interest of the monthly payment to come (and the following ones), the borrower therefore also has the choice to simply settle his loan.

How do I find the best offer for my loan?

How do I find the best offer for my loan?

Before borrowing, a few reflexes are necessary. To find the most attractive consumer credit offer, the most reliable solution is to compare, based on the annual effective annual rate (APR), which includes all the costs of credit. Whether for a credit or for any other sum of money, for that matter. Certainly, this operation requires spending a little time, but on arrival, the borrower is there. To do this, go to an online credit comparator. This tool, which combines different loan offers, saves precious time and allows you to borrow at the best rate.

At the same time, do not hesitate to multiply online credit simulations with different organizations. Why? Quite simply because the credit offers are extremely numerous and the comparators cannot take them all into account. The borrower will then take the measure of the differences in rates that may exist and at the same time increase his chances of finding the rare pearl! This will take only a few minutes. On most banks and online lending platforms, you will find a simulation tool.

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Money for a holiday – cash loan or card payment?

For the sake of clarity of the example calculations of both cases of lending, we assumed that to finance a holiday trip we need exactly 6,000 USD. We will repay this amount in equal installments over the year.

Cash loan

Cash loan

Taking into account the above assumptions, we have prepared examples of financing offers, which were based on average market indicators and presented in Table 1.

Offers were ranked not in relation to the amount of the monthly installment, but on the basis of the total cost of financing reflected by the APRC level, i.e. after taking into account any possible fees due to e.g. commission for granting a loan.

As you can see, it is important not to focus on the nominal or installment interest rate each time you choose a loan, but rather on the actual annual interest rate, which – as we wrote above – reflects all costs of lending.

Table 1 shows that the cost of our sample loan can reach very different values. The lowest of the sample offer assumes the cost of servicing financing at the level of USD 532.62 in the case of APRC at the level of 17.23%.

In turn, we would pay the most for the loan in the case of offer No. 8, where the APRC is as much as 29.65%, and the total cost of financing is USD 842.51.

Credit card

Credit card

On the other hand, in the case of credit cards, we examined interest costs per year for an interest rate range between 12.5% ​​and 17.0% and a step increase of exactly 0.5%. These costs, calculated using the very simple PMT Excel function, are included in Table 2.

According to its indications, the lowest interest cost is USD 413.97, while the most we will pay of course for cards with an interest rate of 17.0% per annum, i.e. USD 566.74.

In the case of credit cards, however, this is not all, because you should also include at least the annual fee for using the card, the amount of which can reach even over USD 200.

An additional cost may also be a commission for establishing an installment payment. It is not charged e.g. in the case of the Comfort Installment Plan of Good Finance, but on the other hand it is 1% (minimum USD 5) for the Installment Plan of Credit Agricole. In our case, it would cost exactly 60 zlotys.

In conclusion, it can be said that the issue of the advantage of credit cards over cash loans is not at all obvious. However, attention should be paid to two very important features of card debt.

Re-examine our creditworthiness

money

First of all, there is no need to re-examine our creditworthiness, which was determined by the granting of the card and its limit.

In addition, taking into account the annual bankruptcy information of a travel agent, a credit card is also a secure solution. This is the result of the possibility of using the so-called chargeback.

It allows you to advertise a given card transaction and recover the payment amount in the event of the bankruptcy of the travel agency mentioned above.

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What are the benefits of a trade credit?

We are dealing here with the consent of the seller to receive payment for the delivered goods (or service rendered) after the delivery date.

The granting of trade credit may be confirmed by a contract concluded between the parties, general conditions of sale or may result only from the payment date specified on the invoice. It does not require any special legal form.

It is a beneficial alternative to loans granted by credit institutions. Loans granted by banks are usually conditioned by carrying out a complicated procedure that requires the borrower to meet many conditions. Trade credit eliminates the banking path and enables crediting of trade between contractors.

Trade credit – advantages

cash

Trade credit is also competitive for bank loans due to costs. It is referred to as the cheapest loan because thanks to it the buyer has the option of selling the goods even before the payment date, and thus does not have to engage their own funds for this period or run revolving loans.

Therefore, it may for some time have other people’s resources at its disposal or create a reserve fund, guaranteeing that payment deadlines are met and, as a result, maintaining liquidity.

We have it at Camille: Cash loan – choose the best offer for you

Recognizing it as the cheapest loan depends, however, on the use of the discount institution (rebate) together. Used without the support of this instrument, it may not be too cheap, but not complicated, and therefore attractive and quick to obtain.

In legal terms, trade credit is a special type of credit, where the partners are business entities that are not financing institutions.

A regular sale/purchase transaction will change into a trade credit if the transaction partners agree to defer payment. The number of days between the release of a good or the provision of a service and the payment deadline is called the credit time.

Supplier’s market and recipient’s market

cash

Trade credit operates in some industries independently, without the support of additional financial instruments. This means that the manufacturer sets the payment rules without negotiation, and the recipient has the choice to join or not to enter into such a contract.

In such cases, the producer treats his position on the market authoritatively and does not use additional incentives to acquire the recipient. This is the supplier’s market.

The reverse situation is one in which the recipient of the goods has the advantage and he dictates the terms of payment. This so-called recipient market. Markets with a predominance of customers or suppliers are a sign of economic imbalance. Then no one needs to use additional support, because his position does not require it.

The main burden of trade in the world takes place in conditions of balanced demand and supply, and then additional incentives are needed to use forms of financial support such as trade credit.

Discount and deferred payment

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One of the main instruments used together with trade credit is a discount. This is a percentage reduction in the price the recipient receives if he pays for the goods immediately upon receipt.

In practice, this boils down to the recipient’s choice of one of two variants; or immediate payment in cash or in another form (e.g. check) and the benefit of a rebate, or definitely a trade credit, which is a deferred payment in which the rebate is no longer present.
Of course, obtaining a discount is not only the recipient’s decision, because his position in the legal relationship, characteristic of trade credit, is identical to the position of the debtor, the condition for obtaining this option is always the creditor’s decision. It is he who tests the credibility of the recipient and sets the rules for granting trade credit.

If such a decision is initially made, then only the recipient has the option of a discount or deferred payment. This does not apply if the recipient is not interested in deferred payments, but only in cash, in which the discount is generally granted.

Trade credit – seller’s risk

Trade credit - seller

The seller is a party that bears a very high risk of a trade credit agreement. That is why, in practice, this loan is granted to companies that you have full confidence and have their basis in a long-term cooperation. The trade-credit is intended for customers who I have no doubt will fulfill their obligations and will pay within a specified period.

The seller who counts on the possibility of granting trade credit to the buyer must consider taking the risk. Customers without proven credibility are treated with a high degree of caution – at the beginning of cooperation they cannot count on receiving deferred payments, and only after some time they can apply for them.

Good to know: Start-up credit – find out more about this type of financial support

There is a possibility of additional deferred payment security, which allows us to overcome the fear of unreliability in loan repayment. The seller may request the buyer to provide adequate security, in the form of a contract for the calculation of penalty default interest, a blank promissory note, surety, pledge or bank guarantee.

Trade credit collateral

money

Trade credit collateral is not only measures taken to guarantee repayment of deferred payments. Overdue payments are a serious problem in the economy, and effective debt collection is often a prerequisite for maintaining the company’s existence in the market.

However, it is possible that all deferred payments are paid on time, but the amount of trade credits granted significantly improves the company’s financial liquidity.

Despite the lack of congestion caused by late repayment, there is a “hunger” for funds in the company’s finances. In such cases, factoring as a safe supplement to the trade credit is a supporting instrument.

It helps in the exchange of overdue receivables for cash, thanks to which problems with the current settlement of liabilities disappear and in this way the company’s balance sheet improves.