The 5 differences between credit and loan (definition and examples)

Credits and loans are services offered by all banks. On many occasions, especially those who are not applying for them, these two terms are considered synonymous when in fact they are not.

There are several differences between credit and lending, with two financial transactions being appropriate for different situations as one offers less money than the other, although interest and repayment terms also vary.

Below we will see the main differences between a loan and a loan, In addition to seeing the definition of these two financial transactions.

    The main differences between loan and credit

    Banks specialize in financing their customers. Among the different financing options they offer, there are two most requested services, both for large businesses and for individuals: loans and lines of credit.

    Although “credit” and “loan” are very common terms when discussing a bank, few users are very aware of their differences and, in fact, do not know if they are two different things or the same thing. Fortunately for them, here we have the definition of credit and loan.

    A loan is a financial assistance service which consists in the bank making available to its customer a maximum amount of money with a fixed limit., Which can be extracted if necessary. That is, the customer does not receive the full amount of money he requests at the same time, but has a stipulated amount from which he withdraws money from time to time, telling the bank how much money he can withdraw every time.

    As long as the customer returns the money they have used, they can continue to have more, as long as the limit agreed with the entity is not exceeded and the return deadlines are met. Credit is granted for a certain period and, when it expires, it can be renewed or extended again.

    With this type of financial transaction, there are generally two types of interest: one is related to the money that has been used, while the other is the interest payable for the customer having the rest. money. offered by the entity.

    A loan is an agreement between two parties: a lender, which is usually a financial institution, and a borrower, who is the customer., Either a person or a company. This financial transaction implies that the lender lends a fixed sum of money to the borrower who undertakes to return it within an agreed period.

    This money will be returned in regular, monthly, quarterly or semi-annual installments, and will be paid over the period set as the deadline for returning the money loaned by the bank. main differences

    Now that we have seen the definition of credit and loan, we turn to the main differences between the two types of financial transactions.

    1. Amount of money acquired

    Loans are often used to quickly access large sums of money and use them to finance goods and services that involve paying large sums of money, while explicitly telling the bank what is desired. Loans are given to cover expenses that have been planned in advance.

    In the case of loans, you have access to smaller amounts of money compared to loans, but which are needed to meet unforeseen expenses. In other words, that is to say the amount of money acquired in loans is less and is requested according to the needs that arise in everyday life but which cannot be paid for with a savings fund.

    2. Interest

    Since the way to acquire money in a loan and in a loan is different, this also determines the interest rates paid. The main difference in this aspect is that in the loan, the proportional interest is paid for all the principal that has been given to the client at one timeDuring the loan, interest is paid on the money that has already been used, and not on the full amount that the financial institution has made available to the customer.

    In credit a one-off interest is paid, which generally corresponds to the percentage of money by which yes it has been used, while in the loan it is paid regularly until the money is returned.

      3. Return conditions

      There are differences in the repayment terms between loans and credits. In the case of loans, the repayment period is longer because the amount of money handed over to the client is larger and it is not possible to expect him to return it all in a very short time. Usually, these deadlines are usually several years, having to pay the customer monthly, quarterly or semi-annually the fees requested by the bank.

      however, in the case of loans, their repayment periods are shorter since the money offered by the entity is less. Typically, the customer must return the money within 30 or 40 days of withdrawing a specific loan, paying interest. If you don’t, you may have to pay even more interest.

      4. Situations where they are more appropriate

      Credits and loans differ in the situations where they are more appropriate. Both financial transactions provide the client with a certain amount of capital, but the way they do so makes the credits more suitable for more day-to-day situations while the loans are more used to pay for large projects.

      For example, people apply for loans to pay for home renovations, the purchase of a new car, or their children’s education, which is a planned expense.

      In the case of loans, they are useful for daily contingenciesHow can they be ahcer when it comes to fixing a device, buying new school supplies or paying for a private health emergency?

      5. Bureaucracy

      The bureaucracy behind a loan and a loan is also different. When applying for a loan, after giving the financial institution a large amount of money, the customer must come to the bank in person, bring all the necessary documents and have a blank file, justifying why he wants the money and proving that it will be. able to return it.

      In the case of loans, although the bank also has its own security and control measures to ensure that the customer does not run away with this money, they are easier to give., Can be done online and without paperwork.

      Bibliographical references:

      • García-Merino, JD (2010). Corporate financing instruments. Basque Country, Spain. Faculty of Economic and Commercial Sciences of the University of the Basque Country. ISBN: 978-84-693-1206-3

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