It is perfectly normal that throughout our life we need to resort to external financing on some occasion in order to cover some of our expenses. It can be to make an important outlay in a house or in a car, or something smaller like a trip to celebrate silver weddings. Whatever the reason you need to go to a bank to ask for financing, it is essential that you know the difference between credit and loan to know which product is the most appropriate in your case.
What is a credit?
It is a financial product in which the creditor lends the debtor a certain amount of money that he must return in the agreed time and form. The peculiarity is that the money returned becomes available to the debtor again if he wants to spend it.
A very clear example is with the credit cards. Imagine you have a credit limit of USD 3,000 and spend 1,000, your credit line then becomes USD 2,000. But in the following month you return USD 500, so your credit line now amounts to USD 2,500.
What is a loan?
It is a financing tool very similar to credit, with the particularity that in this case the money returned is not again available to the debtor.
Think about your mortgage. At the time, the bank lent you the money to pay the house to the seller and now you are returning the loan in monthly installments. The money you pay is deducted from the principal debt and its corresponding interests, it does not become a fund or financing line that you can reuse.
Main differences between credit and loan
The main difference is that in the loan we access the money at once, while the credit money can be accessed based on the needs we have at each moment, and as we return the money we still have it available.
But this is not the only difference, there is more that it is convenient that you know:
The credit allows you to access the money (as long as it is within the limit of the financing that the bank has given you) gradually. Thus, if you do not use it, you will not have to pay interest for that part of the money that you have not touched.
In a loan you will pay interest for the total amount that the bank has lent you, while with a credit line you will only pay interest for the part you actually use. Of course, keep in mind that the interests of a loan are higher than those of a loan.
The loan has a more particular purpose, while the credit is more oriented towards the business world. For example, for a freelancer who is starting his business it may be better to ask for a line of credit instead of a loan.
The amount received
Typically, the amount of loans is greater than the amount requested on credit. The loan usually covers specific and thoughtful financing needs, while the credit is more adequate in case of specific financing needs.
If with a loan you can obtain a greater amount of money, it is also logical that the bank requires more guarantees in this case.
Precautions when requesting financing
It doesn’t matter if you are going to ask for a loan or a credit, before making the final decision, keep in mind that:
- It is essential that you analyze several financing options to know which entity offers you the best conditions.
- Read the contract in detail before signing it and resolves all doubts you have regarding it.
- If you resort to external financing, make sure that the monthly payments that you will have to pay are viable for your economy.
What is the best option in your case?
Now that you know the difference between credit and loan, it is important to be clear that each of these products may be recommended depending on your personal circumstances.
If you need a large sum, it is better to use a loan, but if you need a specific amount of money, the credit may be better for you.
Of course, before making a decision the best thing we can recommend is that you put yourself in the hands of an expert advisor who can help you find the most suitable financing product for you. Helping you at the same time to establish a short, medium and long term plan so that your economy is ready to cover your current and future needs and face unforeseen events.