HomeInsurance Related TipsWhat are the differences between a loan and a credit?

10 months ago (11/02/22) 204 Views

What are the differences between a loan and a credit?

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Loan and credit are different financing mechanisms. Both are banking products that provide capital to the applicant but have differences in terms of definition and objectives. While a loan provides all the money requested at once at the time of its granting, in a loan the bank makes an amount of money available to the client, who can use it according to their needs, disposing of the entire amount borrowed, part or nothing.

Differences between loan and credit

A loan is a financial product that allows a user to access a fixed amount of money at the beginning of the operation, with the condition to repay that amount plus the agreed interest within a certain period. The repayment of the loan is made through regular installments. Among the main characteristics of a financial loan are:

  • The operation has a previously determined life.
  • Once all the capital has been amortized through the payment of installments (monthly, quarterly, semi-annual…), the operation is terminated without the possibility of accessing more money, unless a new loan is formalized.
  • Interest is charged on the total money borrowed.
  • Loans have a longer-term, usually years.

A loan is a more flexible form of financing that allows access to the amount of money borrowed according to the needs of each moment. The credit establishes a maximum limit of money, within which the client may partially or dispose of. It may be that the client uses all the money granted, only a part or nothing. We review the main characteristics of a credit that differentiate it from a loan:

  • The interests of the credits are usually higher than those of a loan.
  • Interest is only paid on the amount used, although there may be a minimum commission on the undrawn balance.
  • As the money is returned, it will be possible to continue having more, as long as the set limit is not exceeded.
  • In general, unlike the cab loanthe credit is renewed each year to continue allowing the client to use that line of financing when needed.
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The usual figures to obtain financing through a credit are the credit card and the credit policy or line of credit, which is usually articulated through a current account in which funds can be deposited and withdrawn up to the limit. granted.

Credits are usually used to cover gaps between collections and payments by companies, to face specific periods of lack of liquidity, or for specific purchases. On the other hand, loans are usually used to finance the purchase of a good or service.

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