The 5 differences between credit and loan, explained
Credits and loans are services that all banks offer. On many occasions, especially those who do not request them, these two terms are thought to be synonymous when in fact they are not.
There are several differences between credit and loan, two financial operations being appropriate for different situations since one offers less money than the other, although the interest and the repayment term also vary.
We’ll see now the main differences between a credit and a loan, in addition to seeing the definition of these two financial operations.
The main differences between loan and credit
Banks are specialized in financing their clients. Among the various financing options they offer, two services are the most demanded, both by large companies and by individuals: loans and lines of credit.
Despite the fact that “credit” and “loan” are terms that are widely heard when we approach a bank, few users take into account very well how they differ and, in fact, because they do not know they do not know if they are two different things or the same . Luckily for them here we have the definition of credit and loan.
A loan is a financial aid service that consists of the bank making a maximum amount of money available to its client with a fixed limit, which will be able to extract when required. That is to say, the client does not receive all the amount of money that he asks for at once, but has a stipulated amount from which he takes a little money from time to time, indicating the bank how much money he can take out each time.
To the extent that the client returns the money that he has used, he may continue to have more, as long as the limit agreed with the entity is not exceeded and he respects the return deadlines. The credit is granted for a specified period and, when this expires, it can be renewed or extended again.
With this type of financial operations there are usually two types of interest: some are those related to the money that has been used, while the others are the interest to be paid for the fact that the client has at his disposal the rest of the money that has been used. offers the entity.
A loan is an agreement made between two parties: a lender, which is usually a financial institution, and a borrower, who is the client, be it a person or a company. This financial operation implies that the lender lends a fixed amount of money to the borrower who agrees to return it within an agreed term.
This money will be returned through regular installments, which can be monthly, quarterly or semi-annual and will be paid over the period stipulated as the time limit to return the money that the bank lent. Main differences
Now that we have seen the definition of credit and loan, we will now see the main differences between both types of financial operations.
1. Amount of money acquired
Loans are often used to access large amounts of money quickly and use it to finance goods and services that involve paying large sums of money, although explicitly indicating to the bank what you want to pay with this capital. Loans are granted to meet expenses that have been planned in advance.
In the case of loans, you have access to smaller sums of money compared to loans, but which are necessary to meet unexpected expenses. That is to say, the amount of money acquired in the credits is less and is requested according to the needs that arise in everyday life but cannot be paid for with a savings fund.
As the way of acquiring money in a credit and in a loan are different, this also determines the types of interest that are paid. The main difference in this aspect is that in the loan the proportional interest is paid for all the capital that has been given to the client at once, while in credit, interest is paid for the money that has already been used, not for the total money that the financial institution has made available to the client.
In credit, a one-time interest is paid, which usually corresponds to the percentage of money that has been used, while in the loan it is paid regularly until the money is returned.
3. Return periods
There are differences in repayment terms between loans and credits. In the case of loans, the repayment period is longer because the amount of money that has been given to the client is greater and it is not possible to expect him to return it all in a very short time. Normally these terms are usually of several years, having to pay the client monthly, quarterly or semi-annually the fees that the bank requests.
Instead, in the case of credits, their repayment terms are shorter since the money that the entity offers is less. As a general rule, the client must return the money within the next 30 or 40 days after having extracted a specific loan, paying their interest. If you don’t, you may have to pay even more interest.
4. Situations where they are most appropriate
Credits and loans differ in the situations where they are most appropriate. Both financial operations make a certain capital available to the client, but the way in which they do it makes loans more appropriate for more day-to-day situations, while loans are more used to pay for large projects.
For example, people apply for loans to pay for the renovation of their house, the purchase of a new car or the studies of their children, which involve a planned expense.
In the case of credits, these are useful for everyday unforeseen events, as they can be facing the repair of an appliance, buying new school supplies or paying for an emergency operation in the private health
The bureaucracy behind a credit and a loan is also different. When applying for a loan, having given the financial institution a large amount of money, the client must attend the bank in person, bring all the necessary documentation and have a clean file, justifying what they want the money for and demonstrating that you can return it.
In the case of loans, although the bank also has its own security and control measures to monitor the client not to run away with that money, they are easier to give, being able to do it through the Internet and without paperwork.
- García-Merino, JD (2010). Business financing instruments. Basque Country, Spain. Faculty of Economic and Business Sciences of the University of the Basque Country. ISBN: 978-84-693-1206-3