There are occasions in life when a person has the need to ask for money to buy a good, pay a certain service or face an unexpected expense. Other times you just need extra help to your economy to solve a liquidity problem in your business or start a major investment. In these circumstances there are many who need to ask for financing, but before accessing this route it is convenient to know the differences between the loan and credit terms. And, although they are often used as synonyms, these financial products are not the same. That is why it is convenient to know how to differentiate them and thus be able to decide between one or the other.
What is a loan?
In a loan, the financial institution gives the applicant a fixed amount of money at the time of signing it. Both agree that the amount lent has to be returned within a certain period, usually through regular fees, which can be monthly, quarterly, etc. The usual thing is that the installments have the same amount for the entire time it takes to pay the loan and with them the money borrowed is returned and a portion of the interest is paid. These interests are charged on the total that the entity has lent to the requesting person.
Loans are usually requested for the purchase of a good, such as a house (mortgage loan) or a car; or a specific service, such as student loans or those used to book a vacation, for example.
What is a credit?
In the case of credit, the financial institution makes available to the client an amount of money, but it is not delivered all at the beginning of the operation as with the loan. The money is available to the person to whom the credit is granted for a certain time and can use it according to the amount you need at any time. To access this money you can use an account or a card.
As the client returns the money, he may have more, but without exceeding the agreed limit. The deadlines for returning a credit are decided by the client, so it has more flexibility than loans.
Interest is paid based on the money that the client has used and a commission is usually charged on the balance that has not been used. These interests are usually higher than those of a loan. When the agreed term for the loan is over, it can be renewed or extended. The credits are usually used to overcome mismatches between collections and payments or moments of lack of liquidity, so they are more suitable for businesses than for individuals.
The main differences between loan and credit are
- Availability of money : in one payment or progressive.
- Return terms : with fixed or more flexible fees.
- Interest : depending on the total amount or what is actually available.
- Purpose : to purchase a specific asset or to overcome specific liquidity problems.