Difference between loans and credit

Have you ever wondered what the differences are between credits and loans? If you are one of the people who use the two concepts equally, then you are wrong because credits and loans they are not exactly the same. Although we generally use the word credit as a synonym for loan, in reality credit is a much broader expression since it would encompass other concepts such as credits, personal loans, consumer loans, mortgage loans and even credit cards.

Despite this, "Credit" and "loan" They are two words that we often consider as synonyms, and that in popular and colloquial language function as such.

The credits could be divided into two: credit and loans, and two other concepts may arise from loans: personal and mortgage. Let's further explore the differences between loans and credit, as well as the ways in which each is used.

What is a financial loan?

The loan is a financial operation through which a person or entity called a lender gives another, called a borrower, a fixed amount of money. This sum of money, which is in an amount fixed between both parties, is what constitutes the loan itself.

Evidently the lender does not part with your money without a reason. And this is that, through a loan contract, the borrower agrees to return the amount loaned together with the agreed interest after a certain term, suppose, for example, a year and a half.

The repayment of the loan is known as amortization, and it takes place, normally, in regular installments: quarterly, monthly, semi-annual, or in any period we want, throughout the established term. Therefore, the entire loan operation has a predetermined life. In the case that we put before, all the money will be returned in eighteen months, whatever the installments and their frequency.

Another main characteristics of the loan is that interest is charged, always, on the total amount loaned.

Loans are usually made to finance the acquisition of a specific service or good.

What are the credits?

Credit is the amount of money, with a fixed limit, that a bank or credit institution makes available to a customer. This will not receive the total amount at once, as in the case of the loan, at the beginning of the operation, but, on the contrary, it will be able to dispose of it depending on its needs at all times, normally through from a credit card or account.

With all this, we want to say that the entity is going to make deliveries, in part, of that money made available to the client at their request. The client may want to have everything the money granted by the bank, but it may also claim only part of it, or claim nothing at all. The main advantage is therefore flexibility. This gives us the ability to deal, for example, with unexpected payments.

In addition, the client will only pay interest for the money that you have claimed effectively, although a commission is normally charged for the balance that you have not disposed of. Thus, as the money that has been made available to them is returned, the client will be able to have more, always without exceeding the agreed limit.

Like loans, credits are granted for a certain period, but unlike the other modality, at the end of the period it can be renewed or extended depending on the needs of each person. In this way, credits are the most suitable modality to cover the gap between collection and payment of financial companies. They are widely used, especially by SMEs, and there are various modalities, such as loans with dicom.

Different cash withdrawals in credits and loans

The credit is associated with a current account, with an agreed limit of funds available. In this checking account it is possible to withdraw or deposit money, so that the balance of it can be creditor or debtor (in our favor or against).

In the loan, the bank leaves us an amount, which enters our account and we have it fully, however the credit is more flexible since both the provision of funds and their return are at our discretion.

Thus, cash flows to which the credits and loans must respond are different respectively.

Time differences between credits and loans

El credit is short-lived, generally less than a year, however the personal loan usually has a longer duration of between 24 and 60 monthly payments. Of course, in mortgage loans, the duration can reach up to thirty or forty years.

So duration can be helpful in distinguishing between credits and loans.

Another important difference between credits and loans it is the way interest is calculated. The calculation of interest is different, so that in the loan they are calculated at the beginning and added in the installments that we are paying. For its part, in the case of credit, they will be calculated based on the dispositions of money that we make, although it should also be noted that in these operations the banks charge us small amounts, for the capital not disposed of.

The interest in the case of credit is usually higher than that of a loan, but as mentioned before, we will only pay for the amount that we actually use.

Optimization of use of credits and loans

Credit is an optimal formula To cover temporary liquidity situations, they leave us the money at a time when we are short of it, but it is expected that this will change in a short period of time, so that the total cancellation is allowed at one time, without any penalty. This type of operation is indicated for companies, professionals or public administrations, with cash flows, variable liquidity flows.

The loan is more suitable for people with fixed incomes, those for whom it is easier to agree on monthly installments that they can cope with without major problems.

Together with traditional credits and loans We found in the market a new product, known as a loan or treasury credit, which, being basically a credit policy and functioning like it, allows the making of monthly payments, in a previously agreed amount, which allows that at the expiration of the policy, Upon completion, the outstanding capital is less and therefore easier to return.

Better credit or better debit?

There are very important differences when it comes to choosing a card, because nowadays payments are not only made in cash as it was a while ago, today we have the electronic money option, and with this come some common difficulties and doubts that arise from some different options that we have, such as whether a credit card or a debit card is better.

In debit cards, payment is accepted only if you currently have a balance in your associated account, in short, you cannot spend more than you have. In turn, in credit cases it is not necessary to have the money at that time, but the bank advances the money up to a monthly limit and allows you to pay the accumulated amount of each month or postpone it in several months but at a very high interest .

If you choose defer payment for several months You must take into account that if credit cards are not controlled they can become dangerous, because you must pay the charge when it reaches your account. If you miss your payments, you can continue to be in debt for a long time, and it can be very difficult to get out of debt.

If you choose to pay at the end of the month, your credit card It works like a debit card but with the advantage that it accepts transactions that are not accepted by debit card. For example, if you have to rent a car you need to use a credit card.

Perhaps the best option is to have a debit card and a credit card in which you have set a limit according to what you can pay without problems at the end of the month.

So remember that in the end you decide what is best for you at the moment, just remember the advantages that each offers you. card type And take into account that if you are going to have a debit card and you do not control your expenses, you can remain in debt for a long time, and remember that with a debit card you will not be able to make some payments in which it is necessary to give your card details of credit.