Loans and credit are different financing mechanisms. Both are banking products that provide capital to the borrower, but they differ in terms of definition and purpose. While a loan provides all the required money at once at the time of issuance, in the case of a loan, the bank provides the customer with a sum of money that he can use if necessary, the entire loaned amount, part. that or nothing at all.

What is the difference between a loan and a credit?
What is the difference between a loan and a credit?

Differences between loan and credit

A loan is a financial product with which the user has access to a certain amount of money at the beginning of the transaction, with the condition that this amount plus the agreed interest will be returned in a certain time. The loan is repaid in regular installments. The main characteristics of a financial loan include:

  • The transaction has a pre-determined life span.
  • Once all the capital has been repaid through the payment of the instalments (monthly, quarterly, half-yearly…), the operation is concluded without the possibility of accessing more money, unless a new loan is arranged.
  • Interest is charged on the total amount of money borrowed.
  • Loans have a longer term, usually of years.

A credit is a more flexible form of finance that allows you to access the amount of money loaned, according to your needs at any given time. The credit sets the maximum limit of money that the customer can partially or fully use. The customer can use all, part or none of the money provided. We examine the main characteristics of credit that distinguish it from a loan:

  • Interest on loans is usually higher than on debt.
  • Interest is only paid on the amount used, although there is a minimum charge on the unused balance.
  • If the money is returned, more can be used as long as the limit is not exceeded. Unlike a loan, a loan is usually renewed annually so that the customer can use the credit facility as needed.
  • The most common ways to get financing through credit are credit cards and lines of credit or lines of credit, which are usually arranged through a checking account where deposits and withdrawals can be made within the appropriate limit.

Credits are typically used to cover delays between receipts and payments for companies, to address specific periods of liquidity shortages, or to make specific purchases. Loans, on the other hand, are often used to finance the purchase of goods or services.

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