Term loan vs credit card APR — the true cost of borrowing
Same APR, completely different total cost. Here's the math most owners only see after it's too late.
When businesses need capital, two common options look superficially similar: a term loan and a business credit card. Both express cost as APR. Both provide access to capital. But they function very differently — and that difference determines the actual total cost of borrowing in ways the headline rate doesn't capture.
A term loan is a lump sum up front, fixed schedule, set term (months to years), and a defined payoff date — you know exactly when it ends. A business credit card is revolving credit, often with a variable APR, interest accruing daily on the outstanding balance, and minimum payments that allow the balance to persist indefinitely.
Real numbers — same amount, similar APR, dramatically different outcomes. Scenario A: $20K term loan at 18% APR over 12 months. Monthly payment around $1,834, total interest paid around $2,008, total cost around $22,008. Paid off, done, twelve months. Scenario B: $20K balance on a credit card at 24% APR with 2% minimum payments (~$400/month). Time to payoff: 8+ years. Total interest: $19,400+. Total cost: $39,400+ — nearly $17,000 more on the same starting balance.
What drives the gap is structure, not rate. Credit card interest compounds daily on the full outstanding balance. Term loan interest is calculated on a declining principal each month. Minimum payments on a credit card barely cover interest; principal reduces slowly. The structured payoff of a term loan eliminates the variable that costs people the most — discipline. You literally cannot accidentally carry a balance for eight years on a 12-month term loan.
When does a credit card actually make sense? If you can pay the full balance within 30 days. For small short-term purchases. During an intro 0% APR period if you'll pay it off before the rate changes. Otherwise, for any meaningful amount you need to repay over more than a month or two, the structure of a term loan almost always wins on total cost. The number on the label is one input. The structure is the variable that quietly determines what you actually pay.
