Which Is The Better Lender – VISA Or A Bank?

By Greg McFarlane | January 30, 2012 AAA

Credit. It's what separates us from the lower primates. With it, we're granted temporary access to other people's money; money we can use to finance aspirations greater than if we were limited to our own money. The lenders get interest, the borrowers get leverage and the economy grows. What's not to love? Without credit, capitalism would stagnate.

But who to borrow from? There are thousands of institutions in the business of lending money, some even bear the imprimatur of the Federal Deposit Insurance Corporation. So it's just a case of going to whoever offers the lowest rate, right? (For related reading, see Who Backs Up The FDIC?)

SEE: Credit Cards

The answer is both yes and no, because "interest rate" is rarely a static concept.

Personal loans carry the highest interest rates of most any classification of loan, because they're typically unsecured. With no collateral to take possession of should you fail to pay back the money, a lender has little choice but to charge high interest: higher than for, say, a mortgage or a car loan. Homes can be foreclosed upon, vehicles repossessed.

A typical personal loan from a bank – to have enough money to pay for jet skis, a vacation or whatever – will cost you on average around 11%. Let's leave aside the following arguments: you shouldn't finance such luxuries; if you do, you'd get a better rate on a home-equity loan (assuming you own a home); borrowing from a rich family member is the way to go, or go without. Those unsecured loan rates are enormous, but they're still less than the listed interest rate on most credit cards.

On the surface, financing with a credit card would seem to be a cardinal financial sin. We've all heard of how the average family carries some distressing amount of credit card debt (almost $16,000, by one estimate.) Credit card interest rates are so high, ranging up to 79.9% in some cases, that Congress and the President felt the need to artificially cap those rates from outside the free market. Given credit cards' reputation, that makes the question of bank versus VISA a non-starter, right? Shouldn't you always borrow from a bank, no matter what? (For additional reading, check out 7 Unconventional Ways Businesses Can Borrow Money.)

Not quite. The overwhelming advantage to borrowing on a credit card, rather than from a bank, is that only the former charges zero interest. Really, it does. That's not a typo. Check your cardholder agreement if you're skeptical.

That's right. For the first 30 days after you purchase something, doing so on a credit card is the equivalent of doing so with cash. The listed price for the item is what you pay. Keep the terms of your loans sufficiently short, and you'll have the lender dancing to your tune. With a personal loan from a bank, you're paying interest from the day you take possession of the money. Even if you never use it, which defeats the purpose of borrowing the money in the first place.

Should you choose to take 31 days or longer to pay for an item you bought on a credit card? Well, that's when you're failing to take advantage of the inherent benefit of the method of payment.

Credit card issuers understand that they're operating at a perceived disadvantage to banks, which is why the former offer extra perks. For the convenience of freeing yourself from having to carry cash for every single purchase, being able to dispute purchases from unsavory merchants and buy things online at the click of a button, issuers justifiably expect something in return for giving you use of a credit card. The something the card issuers expect? Interest. And smart cardholders never give them that satisfaction.

For short-term wants, the answer to the bank versus VISA question is easy. Put every single purchase on that VISA card, and think nothing of it. 30 days is plenty of time. For most of us, it's two pay periods: two opportunities to have gotten your hands on enough of your own money to pay back someone else's. Plus credit cards generally come with a grace period. Grace periods don't exist in the world of personal loans.

What about loans incurred solely for the purpose of trying to earn more money? (Or to coin a phrase, "business loans.") Banks of course offer them, at better rates than personal loans, and for terms ranging from several months to several years. These loans are collateralized by the proceeds of the business itself. It should go without saying that given the length of the typical business loan, and high rates charged by credit card companies, that in this instance the answer to the question is really obvious: you should never finance a business venture on a credit card. Yes, Google's founders famously did so, but do you honestly think your startup will grow to Google's size? The failed businesses that got buried under insurmountable risky credit card debt vastly outnumber the few that successfully pulled off this dangerous stunt.

So is there ever a justification for borrowing off a credit card when you can borrow from a bank? Only in the most extreme of circumstances, when you need fast cash immediately and don't have time to fuss with paperwork. Like if someone's holding your daughter hostage.

For a less traumatic and more plausible scenario, a purely economic one, say you were prescient enough to have timed the market perfectly and placed a $100 bet in early December on the New York Giants to win the Super Bowl. (The Giants had lost 4 consecutive games, and were trading at 80-to-1.) Had you placed that longshot wager, then in the fortnight between the conference championship games and the Super Bowl itself, it would have made sense to have hedged your bet; that is, to have wagered enough money on the other side to guarantee yourself the same payout regardless of the game's outcome. (For related reading, see Credit Card Arbitrage: Free Money Or Dangerous Gamble?)

The Giants' opponent, the New England Patriots, were favored to win the game at 5-to-7 odds. A little calculation shows that a $4,725 bet on New England would have guaranteed you a $3,275 profit, no matter who won the game. You could therefore watch free of worry, without having to concern yourself with such trivialities as having a rooting interest.

If you don't have $4,275 in cash on hand, but you've got a VISA with a decent-sized credit limit, then securing that money for a certain profit takes mere seconds. Plus, using a card implies anonymity. You don't have to justify your loan to any lender. You don't even have to say what it's for.

But to borrow such a relatively modest amount of money from a formal lending institution requires paperwork. And a face-to-face meeting with a loan officer. And, worst of all, a few days' turnaround time, which you can hardly afford in such a time-sensitive situation. (To say nothing of the time it would take you to explain your unusual situation to the loan officer. Skepticism is a prerequisite for that job.)

The Bottom Line
In short, always look at the transaction from the other party's perspective. Understand the terms, and learn how to use them to your advantage. And if a lender is willing to charge you below market interest rates – like a credit card issuer that levies 0% for the first month – smile and take them up on that most generous offer. (To learn more, read Understanding Credit Card Interest.)

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