Auto loans and credit cards fall under two separate categories of credit, so they have to be completely different, right? Actually, an auto loan and a credit card are very similar in one regard.

The Two Types of Credit

Credit accounts help consumers out of tight spots when a bigger purchase comes up that they don't have cash saved up for. These accounts mainly fall under two categories:

Auto Loans and Credit Cards

  • Revolving Credit Accounts
    Credit cards are the most common type of revolving credit. With this type of account, a consumer is able to get a line of credit with a set borrowing limit. The account holder can borrow up to that limit at any time, but there is no firm timetable you have to adhere to when it comes to paying it back. There will be a minimum monthly payment based on the account's balance, but it can be carried over to the next month.
  • Installment Credit Accounts
    Loans and mortgages are the most common forms of installment credit. With these accounts, a consumer signs a contract to borrow a certain amount of money over a set period of time. The consumer pays back the amount borrowed with fixed incremental payments.

Right off the bat, you should notice some big differences between the two types of credit. The biggest probably being that installment credit has an agreed-upon timeline that will be followed, while credit cards don't have an "end date" attached to the debt. However, savvy borrowers will recognize that they are quite similar in one regard.

You Have More Power Than You Know

While auto loans and credit cards have some inherent differences, both involve borrowing money to make purchases. And when you finance something, you will usually be charged interest on it. But how much you end up paying in the long run is largely up to you and how you manage these credit accounts.

In this regard, something as different as taking out an auto loan for your next car and charging a pair of concert tickets to your credit card is no different. You have financed the purchase and how you manage the debt will directly influence how much you end up paying in the long run.

Imagine that you charge some concert tickets costing $200 to your credit card. If you only made the minimum payments every month until they are paid off, you will most certainly end up spending much more than $200 thanks to interest. And this is without factoring in any other balance the credit card may be carrying. If your credit cards aren't managed carefully, you can get caught in a vicious debt cycle.

The same can be said for a car loan with a focus on a low monthly payment. Many borrowers extend the term of their loan in order to keep the monthly payment amount nice and low. Yet many fail to realize that this means that they will be charged interest for longer as well. This type of mentality could result in a loan that costs the borrower far more than the original price of the car that was purchased.

The Bottom Line

Auto loans and credit cards may fall under different categories of credit, but the premise remains largely the same: You have to deal with paying back the resulting debt. If mismanaged, it can lead to some serious financial trouble. So, the next time you are considering taking out a loan or charging a purchase to your credit card, think big picture and take control of the situation to manage the debt as efficiently and effectively as possible.

And if you need an auto loan, Auto Credit Express specializes in helping consumers in all kinds of credit situations get connected to the resources that can get them approved. Our process is quick and easy, and our service is 100 percent free. If you are looking for hassle-free auto financing, get started by filling out our secure online application today.