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.
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.
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
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.