Credit vs loan: Are They Different?
With credit we talk about a way to finance the payment of your purchase; Loans are usually granted to finance a good or service.
In general, there may be certain doubts regarding the differences between a credit and a loan, since, in theory, it is about the possibility of accessing a certain amount to be able to acquire a good or service. In order to understand what differences there are between each one, it will be necessary to understand each term in particular.
What is a loan?
A loan is the financial operation in which a certain financial entity, called a lender, gives a user an amount of money at the beginning of the operation, with the condition that the money be returned together with the agreed interest within the previously determined term.
The loan itself is a contract that is perfected with the delivery of the money by the financial institution. And it can be formalized before a notary public so that, in case of non-payment of the same, the seizure and possible execution of the debtor’s assets can be carried out without the need for a judicial process.
The latter will depend on the amount requested and the conditions previously established by the granting financial institution. The amortization (repayment) of the loan is normally made through regular installments, whether fortnightly, weekly, monthly, quarterly or semi-annually.
What is a credit?
In general, when applying for a loan we talk about a way to finance the payment of your purchases. The return takes place after, during a period of time agreed with the creditor, and the payment options offered by the entity that granted you the credit (either in fixed installments, months without interest or revolving charge).
Main differences between loans and credits
Here we summarize the most important ones, to understand how each type of financing works:
- In loans, interest is charged on the total amount of money borrowed; while in credits you only pay interest for the money you have actually drawn, although a minimum commission is usually charged on the un-drawn balance.
- When accessing a credit, the customer is not given that amount all at once at the beginning of the operation, but rather can make use of it according to their needs, using their account or credit card. In loans, money is usually deposited for immediate disposal and use.
- For making punctual payments and making constant use of the credit, the limit can be extended, so that the client can make use of it and renew it, without exceeding the credit limit.
- The interests of the credits are usually higher than those of a loan, however, you only pay for the amount used, while in the case of loans, from the beginning of the contract, it is stipulated how much interest will be paid.
- Loans are usually granted to finance the acquisition of a specific good or service: a car, some studies, a home renovation, etc. Credits are used to cover collections, payments and purchases and are usually used when liquidity is lacking in the user’s personal finances.