The Biggest Difference Between Payday Loans and Credit Cards

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The two most commonly-used types of credit by consumers who need small amount of lending are credit cards and payday loans. These are significantly different types of financial deices. A credit card—or a store account—is what is called revolving credit. A payday loan is what is called short-term credit. Both of these forms of lending are distinguished from traditional installment loans by the fact that they can be written for very small amounts of principal. Installment loan providers would generally not be able to offer loans for small amounts and guarantee profitability.

A credit card loan is called revolving because the account may be for a larger or smaller amount at various times. This total amount, of course, is dependent upon how much debt the consumer chares to that account. While a credit card may have an official limit of $5,000, the consumer might only use it for $2,500 of credit over their lifetime. This differentiates it form other forms of lending, as well, as the amount of the loan is not fixed but rather has a maximum amount beyond which it cannot be extend. Contrast this with an installment loan which is always given for the full amount; no more, no less.

Credit card companies have several different ways in which they generate profit. There is the interest, of course, and this is almost always of the variable sort. This interest is calculated by adding the prime rate to whatever the credit card company offers the consumer. For instance, if the prime rate was 5% and the credit card offered its consumers an interest rate of APR+12%, the consumer's interest would be 17%. Oftentimes, credit card companies will raise their rates for seemingly arbitrary reasons, something for which they have received a great deal of criticism.

Payday loans are written for a fixed amount. These loan's total amounts are determined by the borrower's income. The borrower presents proof of their income and the frequency of their payments at the time the loan is secured. The lender, working with state regulations, determines how much of a loan the consumer may take relative to their income. These loans are not designed to be written for large amounts. These loans are usually used to tide one over from paycheck to paycheck, so that one need not tap into their savings or other financial resources.

Payday loans are designed to be paid off very swiftly. This helps keep the cost of the financing low for the consumer while still allowing the lender to maintain a profitable business. A credit card, by contrast, will usually have a payment plan that will require the consumer to spend years paying off a small debt. Of course, the consumer is likely to negate their payment by making more charges which tends to turn these devices into lifetime burdens for the consumer. Most payday loans are simply taken out, paid off and done away with in short order, making them generally more manageable

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