At this point, I’m sure most people believe they fully understand how a credit card works. For those who don’t, a credit card acts as a line of credit up to a set amount, or limit. Purchases made with a credit card are usually subject to a certain interest rate and the cardholder is only obligated to pay 2% of their credit card balance off, per month. Sounds easy enough, right?
The fact is that credit cards are designed to keep you perpetually in debt. The temptation to pay only the minimum required amount makes it easy to keep up with payments and feel like you’re on top of things. But this is the type of thinking that costs you more than you might be aware of.
The average Canadian carries a credit card balance of close to $8,600. Now, let’s say the average Canadian also pays the minimum monthly payment of 2% every month on a balance of $8,600. At an interest rate of 19.9%, paying the monthly amount of 2%, it would take you 9 years to pay off the balance, and cost you almost $10,000 in interest charges on top of your initial purchase amount! Also, if your credit card has an annual fee just for using it, you could be looking at an even more costly balance to pay off.
Don’t believe me? Do the math yourself using this credit card debt calculator.
A transparent alternative to credit cards
There are far more cost-effective and transparent ways to finance purchases, big and small. One such alternative is choosing to go with a fixed-term loan.
A fixed term loan offers you a set period of time to pay off your balance with preauthorized instalment payments. You can choose between various payment terms from a matter of months, up to 10 years. You and the finance company agree upon a timeframe and interest rate, then calculate your monthly payments over that set period of time.
For the sake of argument, let’s say you’re financing a used car with a total cost of $8,600. A fixed-term loan of 5 years at the same 19.9% interest rate as applied to the credit card, would take you nearly half as long to pay off, while cutting your cost of borrowing in half!
Fixed-term loans are a great way to finance small or large purchases, while making a series of equal instalment payments over a fixed period of time; and provides a clearer path and timeframe for repayment than credit cards do. Fixed-term loans allow you to efficiently pay off your debt, versus continuing to carry a balance year after year, that ends up costing you more in the long run.
LendCare offers fixed-term loans through our over 6000 partners across the country and offer far less credit-based restrictions than most banks and credit card providers. If you’re looking for a superior way to finance a vehicle, home improvement costs, retail purchases or healthcare services, LendCare has you covered.