Both of these options come with high risks and can be expensive forms of credit. Whether you are based in the Philippines or elsewhere in the world, Asteria recommends that you always consider your means to pay back what you have borrowed before you agree to any kind of agreement that includes making high interest repayments. When managed properly, this kind of borrowing can be useful but when used improperly, it can be one of the fastest ways to financial hardship. Never rush in to signing up for a high interest credit card or salary loan and consider every other available option you have before you decide to go ahead. With that said, here’s Asteria’s comparative guide to Salary Loans and High Interest Credit Cards.
High Interest Credit Cards
This kind of card is commonplace and should generally be used for making purchases that you can afford to pay off relatively quickly, otherwise you will end up paying far more than you need to over a long period of time.
Pros
- Makes Multiple Purchases Easy: Buying multiple items from different stores or online marketplaces is easy with credit cards. Where Salary loans go straight into your bank account, the credit extended to you via a high interest card does not. Some cards may have the option of an instant money transfer but if you can pay for goods or services directly without doing this, it is usually much cheaper.
- Available to Most People: Unlike lower interest credit cards and personal loans, this type of credit is available to practically anybody. Some providers even specialise in offering credit services to those with poor financial histories or previous problems with money. Providing you can afford to make payments regularly without causing problems in your everyday life, this kind of card can be used as a way of buying what you need, when you need it, without having to wait for payday.
- Less Impact on Your Credit Rating: Unlike salary loans, this kind of card does not usually impact severely on your credit rating unless you fall behind with payments. In fact, some cards of this type can be used as “credit builder” options, which allow you to rebuild a damaged credit score. This only works if you are able to pay off what you have borrowed in full each month and will have the opposite effect if you only make the minimum repayments.
Cons
- Extremely Expensive When Used as Long-Term Debt: If you end up spending up to your limit on a high interest credit card and only make the minimum repayments each month, you will end up costing yourself a lot of money in the long run. This kind of card is to be used for purchases that you can easily afford to pay off in regular instalments, without having to go without essentials like food and house payments.
- Easy to Overspend Without Thinking: Having the means to pay or things at the tap of a contactless chip is extremely convenient and can be really helpful in emergency situations, however, it can also lead to a great deal of unplanned overspending that can come back to bite you later on. Setting up alerts via text or using a money management app can be a helpful way of avoiding this, but this is often far easier in theory than it is in practice for some people.
Salary Loans
Salary loans are designed to help people who need to pay for essentials but do not have the cash to do so at the time. This can be for all kinds of reasons, including unexpected bills, repairs, or medical costs. Though they provide a financial lifeline, they are to be treated with respect and never misused, as doing so will inevitably create serious financial problems for you in the future.
Pros
- Borrow Exactly What You Need: Unlike high interest credit cards, salary loans are available for specific amounts, meaning that you can work out exactly what you need and borrow the exact amount. This means you do not have the opportunity to overspend or waste money on impulse purchases.
- Instant Cash: Most salary loans are approved within a matter of hours at the most and the funds are transferred to your account immediately. This means that if you have bills coming out or other payments that are due, you can avoid missing deadlines and incurring unwanted bank charges.
- More Difficult to Spend on Non-Essentials: Salary loans are not designed to be used for frivolous spending and the high interest rates mean that most people are deterred from using them irresponsibly. When you take out a loan to cover the cost of your heating and rent payment in an emergency, for example, you will not be tempted to splurge a little on luxuries.
Cons
- Extremely expensive if not paid off quickly: Salary loans are probably the most expensive way to use credit and if you do not pay them off quickly, they can cause serious financial problems. Always use this kind of loan as a last resort and understand that it is short term, not long-term credit. That means repayments will be much higher but also, if you keep up with them, the debt will be cleared much faster.
- Will Impact Your Credit Rating: Taking out a salary loan will impact negatively on your credit rating, so be mindful of this before you decide to sign up to an agreement officially. It is not always a huge drop but generally speaking the score that credit checking agencies award to you will go down when you decide to take out this type of personal loan. This does not necessarily have to be a problem, providing you have the means to build up your score again. This can be done with credit builder cards, controlled spending and making extra repayments on any existing debt that you might have.
Summary
Both of these forms of borrowing are expensive and the option that is right for you will depend on your personal circumstances. Just remember to consider carefully before you decide to go ahead with any official credit agreement.