Short-Term Loans vs. Credit Cards: What’s the Better Emergency Solution?

As a result, 73% now report saving less for unexpected expenses due to rising prices, higher rates, or changes in their income or employment status.

There’s no wonder why many of them rely on borrowing to manage unexpected expenses. According to Bankrate’s Emergency Savings Report, 35% of Americans would need to take out a loan or use credit to cover an emergency expense of $1,000 or higher. 

Two of the most common financing these American adults opt for are short-term loans and credit cards. In this article, we’ll explore how these two differ and which is better for different financial emergencies. 

Short-Term Loans

Short-term loans are a type of borrowing designed to be repaid within a short period, hence called “short-term.” Unlike long-term loans, which may extend for several years or even decades, short-term loans typically require full repayment within a few weeks to a year. 

There are many different types of short-term loans. According to the Corporate Finance Institute (CFI), these include the following: 

1. Payday Loans – Small, short-term loans typically repaid by the borrower’s next paycheck.
2. Personal Loans – Unsecured loans that provide a lump sum amount, often used for urgent financial needs.
3. Installment Loans – Borrowed amounts repaid in fixed scheduled payments over a set period.
4. Lines of Credit – A flexible borrowing option allowing withdrawals up to a set limit, with repayments based on the amount used.
5. Pawn Shop Loans – Loans secured by a valuable item, which the lender holds until repayment.
6. Title Loans – Loans that use a vehicle’s title as collateral, requiring repayment within a short period.
7. Invoice Financing – Business loans where companies use unpaid invoices to secure funds.
8. Merchant Cash Advances – Business funding repaid through a percentage of daily sales transactions.

These short-term loans are available from both online lenders like CreditNinja and traditional lenders like banks and credit unions. Online lenders commonly provide payday loans, personal loans, installment loans, lines of credit, invoice financing, and merchant cash advances. These options appeal to borrowers seeking fast approval, minimal paperwork, and digital convenience.  

Traditional lenders also offer personal loans, installment loans, and lines of credit but often require a stronger credit history and a more extensive application process. Similarly, pawn shop loans and title loans are typically available through physical locations, where in-person evaluations determine eligibility. While online lenders prioritize accessibility and speed, traditional lenders may offer more structured terms and in-person customer support. 

Credit Cards

Credit cards are revolving credit lines that allow users to make purchases up to a set limit and repay the balance over time. Unlike loans with a fixed repayment schedule, credit cards offer continuous borrowing as long as payments are made and credit remains available. 

Cardholders can either pay off the full balance each month or make minimum payments while carrying the remaining debt forward. This flexibility allows users to manage their finances based on their cash flow. 

According to Experian, here are the main differences between credit cards and short-term loans: 

• Repayment Flexibility: Credit cards allow minimum monthly payments, whereas short-term loans require full repayment within a fixed period.
   
• Ongoing Access to Credit: A credit card provides a reusable credit line, while a short-term loan is a one-time lump sum with a set repayment schedule.
   
•  Approval Process: Credit cards usually require a good credit score for approval, whereas short-term loans may have more lenient requirements.
   
• Usage: Credit cards are versatile for everyday spending, while short-term loans are typically used for emergencies or specific financial needs.
   

Credit cards provide flexibility for ongoing expenses, but debt can accumulate over time without disciplined repayment. Short-term loans, on the other hand, offer structured repayment but may come with higher borrowing costs.

Which Is Better for Emergencies? 

Short-term loans are best suited for emergencies that require a one-time lump sum and a clear repayment plan. They’re recommended for those who can repay within the given timeframe and want to avoid long-term debt. However, they should only be considered when lower-cost options, such as savings or employer advances, are unavailable.

These loans can help cover unexpected medical expenses, including hospital bills, urgent procedures, or uncovered prescriptions. They’re also valuable for emergency car repairs, urgent home repairs, unexpected travel costs, and temporary income gaps due to job transitions or short-term income loss. Since these emergencies often require a timely, one-time financial solution, short-term loans can be an effective way to manage them.

Credit cards, on the other hand, are recommended for emergencies that may need ongoing access to funds and may not require a lump sum. They’re helpful for recurring prescription costs, unexpected travel expenses like hotel stays or rental cars, and minor car or home repairs that can be paid for in stages.

Credit card funds are also recommended for covering medical co-pays, which are upfront fixed medical fees patients must personally pay out of their pockets. They allow patients to pay for necessary treatments or doctor visits immediately, even if they don’t have cash on hand. Additionally, since co-pays can be recurring for ongoing treatments or specialist visits, credit cards allow for managing these costs over time rather than securing a separate loan for each visit. 

Finding the Right Financing Option

Both short-term loans and credit cards can provide immediate financial relief during emergencies, but the better option depends on the borrower’s financial situation, repayment ability, and urgency. In most cases, short-term loans are ideal for covering large, one-time expenses, while credit cards offer flexibility for smaller or recurring costs.