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

Summary on how to distinguish between a credit and a loan, two common financial transactions

Credit and loans are services offered by all banks. On many occasions, especially those who do not apply for them, think that these two terms are synonymous when in fact they are not.

There are several differences between credit and loan, being two financial operations appropriate for different situations since in one a smaller amount of money is offered than in the other, although also the interests and the term of repayment vary.

The following are the main differences between a credit and a loan. the main differences between a credit and a loan. The definition of these two financial transactions will be discussed below.

The main differences between loan and credit

Banks specialize in financing their customers. Among the various financing options they offer, two services are the most demanded, both by large companies and individuals: loans and lines of credit.

Despite the fact that "credit" and "loan" are terms we hear a lot when we approach a bank, few users know very well how they differ and, in fact, because they don't know, they don't know if they are two different things or the same thing. Luckily for them, here is the definition of credit and loan.

A credit is a financial assistance service that consists of the bank making available to its client a maximum amount of money with a fixed limit, which can be withdrawn by the client which he/she will be able to withdraw whenever he/she needs it. That is to say, the client does not receive all the amount of money he requests all at once, but has a stipulated amount from which he withdraws a little money from time to time, the bank indicating how much money he can withdraw each time.

As the client repays the money he has used, he will be able to continue having more, as long as he does not exceed the limit agreed with the bank and respects the repayment terms. The credit is granted for a determined term and, when it ends, it can be renewed or extended.

With this type of financial operations there are usually two types of interest: some are those related to the money that has been used, while the others are the interest to be paid for the fact that the client has at his disposal the rest of the money offered by the entity.

A loan is an agreement made between two parties: a lender, which is usually a financial institution, and a borrower, which is the customer, either an individual or a company either an individual or a company. This financial transaction involves the lender lending a fixed amount of money to the borrower, who undertakes to repay it within an agreed period of time.

This money will be returned by means of regular installments, which can be monthly, quarterly or half-yearly and will be paid over the term stipulated as the time limit for returning the money that the bank lent. Main differences

Now that we have seen the definition of credit and loan, we will see the main differences between both types of financial operations.

1. Amount of money acquired

Loans are usually used to access large amounts of money quickly and use it to finance goods and services that involve paying large sums of money, although explicitly indicating to the bank what you want to pay for with this capital. Loans are granted to meet expenses that have been planned in advance..

In the case of credits, you have access to smaller sums of money compared to loans, but which are necessary to meet unexpected expenses. In other words, the amount of money acquired in the credits is smaller and is requested according to the needs that arise in daily life but which are not in everyday life, but which cannot be paid for with a savings fund.

2. Interest

As the way of acquiring money in a credit and in a loan are different, this also determines the interest rates paid. The main difference in this respect is that in the loan the proportional interest is paid for all the capital that has been given to the client all at once In a loan, interest is paid on the money that has already been used, not on the total amount of money that the financial institution has made available to the customer.

In the credit a punctual interest is paid, which usually corresponds to the percentage of money that has been used, while in the loan it is paid regularly until the money is paid back.

3. Repayment terms

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 given to the client is larger and it is not possible to expect him to pay it all back in a very short time. Normally these terms are for several years, with the customer having to pay monthly, quarterly or semi-annually the installments requested by the bank.

On the other hand in the case of credits, the repayment terms are shorter, since the money offered by the the money that the entity offers is smaller. As a general rule the client must return the money in the following 30 or 40 days after having extracted a concrete credit, paying its interests. Failure to do so may result in paying even more interest.

4. Situations where they are more appropriate

Credits and loans differ in terms of the situations where they are most appropriate. Both financial operations make a certain amount of capital available to the client, but the way in which they do so makes credits more appropriate for more day-to-day situations while loans are more used to pay for large projects.

For example, people take out loans to be able to pay for the renovation of their house, the purchase of a new car or their children's studies, which involve a plannable expense.

In the case of loans, these are useful for everyday unforeseen expenses such as repairing a household appliance, buying new school supplies or paying for an emergency operation at a private health care facility.

5. Bureaucracy

The bureaucracy behind a credit and a loan is also different. When applying for a loan, since the financial entity has given a large amount of money, the client must go to the bank in person, bring all the necessary documentation and have a clean file, justifying what he/she wants the money for and demonstrating that he/she will be able to pay it back.

In the case of loans, although the bank also has its own security and control measures to ensure that the client does not run away with the money, they are easier to give, and can be made through the Internet and without paperwork. They can be made through the Internet and without paperwork.

Bibliographical references:

• García-Merino, J. D. (2010). Business financing instruments. Basque Country, Spain. Faculty of Economics and Business Administration of the University of the Basque Country. ISBN:978-84-693-1206-3