Surely if you are looking for financing you have heard the terms credit and loan more than once. And you probably think that this is the same financial product. However, this is not the case. Despite the fact that today these words are used as synonyms, the truth is that they are products with important differences between them. If you want to know the difference between a loan and a loan, you have come to the right place.
What is a credit
When we talk about a loan we do it to refer to a capital line that a financial institution opens to a client. During a certain period of time the client will be able to access that money and make use of it if there are no problems.
You will only pay interest on the capital that you have used. Surely when reading this explanation you have thought about a type of credit line that you always have at hand: credit cards. In them you have access to a pre-granted capital every month and if you use it you will have to pay recharge interest for using that money.
The most outstanding characteristics of this type of financial product are the following:
- We may use all the money that has been granted to us or only part of it during the period of time stipulated between both parts.
- We will only pay interest for the money we have used, not for all the capital to which we have access.
- We do not suddenly receive the capital in our account, but we have an open line of credit to use and meet the payments we want.
What is a loan
On the other hand, when we talk about loans, we do it to refer to that financial product through which we receive the amount agreed upon by both parties to the contract. In this contract we will acquire the obligation to repay the amount together with the interest for a monthly period.
Unlike what happens in a credit, we will receive the money entirely in our account and we will have to pay interest on it in full.
Fixed or flexible rate loans can be purchased. What does this mean?
- In a fixed rate loan we will always pay the same amount of interest throughout the life of the agreement.
- However, in a variable rate loan, the amount to be paid will vary over the years. For example, this is the case of mixed mortgages.
What are the main differences between both financial products?
In general we can say that the main differences between a credit and a loan are the following:
- The use that is given to the requested money. It is common for loans to be requested by individuals who need to pay off a debt or access capital to finance some type of purchase. Whether it is a car, a house, a household appliance or a reform. Credits are most used by small companies or the self-employed who need a cheap mattress at any given time.
- Greater flexibility in credits. When we access a credit we have greater flexibility when it comes to using and disposing of the money without limit during the agreed period of time. However, the loan is paid in full once.
- Different interest rates. Loans tend to have much lower interest than loans. However, in contrast, in the case of credits we will only pay interest on the capital that we are going to use and not on all the money that has been granted to us. As with loans.