What is the difference between credit and loan?

For a common citizen, with little financial education, the terms credit and loan can lead to equivocation, as many face these words with the idea that they are different concepts. However, as we will see in more detail below, both refer to the same instrument, although with nuances. Due to this recurring doubt, we believe it is important to analyze the difference between credit and loan… if it exists.

Bank credit vs bank loan

Bank credit vs bank loan

When we talk about a credit or credit contract we mean a financial operation through which a person or a financial institution (the creditor) makes available to the person requesting it, at that time debtor or customer, of an amount of money with a predetermined limit.

Generally, if we refer to a credit, the financial institution does not give all the money at once to the client. This, on the other hand, can use the money requested from the institution according to your needs through a bank account or your credit card.

At the request of the client or debtor, in this case, the bank will disburse partial amounts to the person who contracts the debt, according to how it is requested. That is, if a customer has granted a credit of 3,000 USD and requests 500 to make a payment, the entity will only pay the 500 USD requested.

The client that obtains the credit will only pay interest for the money that he has arranged according to what the institution that dispenses said resources proves. The debtor, in turn, agrees to return the money plus a small commission on the undrawn balance.

The advantage is that to the extent that you return the money you can continue to have more, without exceeding, yes, the limit that was set at the time of transacting the operation.

What is a credit: definition

The credits are also granted for a specific term, and quite the opposite of what happens with a loan, when the transaction has ended without problems between the institution and the client or debtor, it can be renewed or extended.

That is a substantive difference with the loan, which implies the end of the relationship between both parties when the debt has been paid. Another difference with credit is that interest is not so high.

As we say, the interest on loans is usually higher than on a loan, but, as it should be emphasized, it is only paid for the amount used. This is a big difference between credit and loan.

What is a loan: definition

A loan is also a financial operation. In it the bank acts as a lender and delivers a fixed amount of money to another institution or person, who becomes the borrower.

The transaction is conditional on the beneficiary of said resources returning correctly and in the stipulated time, the amount of money that was granted as a loan, plus interest generated within a certain term generally set by the lender.

This amortization or payment is made in a fractional manner, by means of predetermined installments and regularly. The conditions of the aforementioned operation are very specific and strict compliance is required.

The end: another difference between credit and loan

The end: another difference between credit and loan

The purposes for which loans or credits are requested also differentiate these financial operations.

Experts explain that when you want to finance the purchase of a specific asset such as a vehicle, a trip, studies, or the modification or repair of the home, for example, you tend to grant a loan.

The credits, on the other hand, are used to cover periods in which there is a lack of liquidity in a company or there is a temporary withdrawal of resources due to delays between collections and payments.

So always remember that applying for a loan is not the same as a loan. The latter are even more recommended for the needs of a company than for the requirements of a particular person. Companies also have financing alternatives, such as crowdfunding, crowdlending or the discount of promissory notes, tools that we have already analyzed in depth in previous articles.