Loan and credit are different financing mechanisms. Both are banking products that provide capital to the applicant but have differences in terms of definition and objectives. While a loan provides all the money requested at once at the time of its granting, in a loan the bank makes an amount of money available to the client, who can use it according to their needs, disposing of the entire amount borrowed, part or nothing.
Differences between loan and credit
A loan is a financial product that allows a user to access a fixed amount of money at the beginning of the operation, with the condition to repay that amount plus the agreed interest within a certain period. The repayment of the loan is made through regular installments. Among the main characteristics of a financial loan are:
- The operation has a previously determined life.
- Once all the capital has been amortized through the payment of installments (monthly, quarterly, semi-annual…), the operation is terminated without the possibility of accessing more money, unless a new loan is formalized.
- Interest is charged on the total money borrowed.
- Loans have a longer term, usually years.
A loan is a more flexible form of financing that allows access to the amount of money borrowed according to the needs of each moment. The credit establishes a maximum limit of money, within which the client may partially or totally dispose of. It may be that the client uses all the money granted, only a part or nothing. We review the main characteristics of a credit that differentiate it from a loan:
- The interests of the credits are usually higher than those of a loan.
- Interest is only paid on the amount used, although there may be a minimum commission on the undrawn balance.
- As the money is returned, it will be possible to continue having more, as long as the set limit is not exceeded.
- In general, unlike the loan, the credit is renewed each year to continue allowing the client to use that line of financing when needed.
The usual figures to obtain financing through a credit are the credit card and the credit policy or line of credit, which is usually articulated through a current account in which deposits and withdrawals of funds can be made up to the limit. granted.
Credits are usually used to cover gaps between collections and payments by companies, to face specific periods of lack of liquidity or for specific purchases. On the other hand, loans are usually used to finance the purchase of a good or service.
HOW A LOAN WORKS
The creditor grants an amount, which is delivered from the first moment to the debtor and must be returned in a certain time, together with the interest generated by that amount.
Both parties agree to all the conditions of the loan: the time in which it will have to be repaid, if it will be done in installments and how much each of the payments will be.
For example, Ana requests a loan of 25,000 pesos from a bank to buy a new computer. The financial institution grants the money and at that moment she has the cash.
Ana agrees with the bank to return the money in 12 monthly installments, so each month she must cover part of the debt plus the interest generated.
AND THE CREDITS?
In this case, the creditor grants a line of credit, with a limit amount, which the debtor can access at the time he deems convenient and does not have to use all the money available.
An example would be that Ana was granted a credit card with an available balance of 20,000 pesos.
She decides to buy a new phone, but she does not use all the available money, only half, so the interest and the credit payment will be only the part that she spent.
It may even be that she decides not to make immediate use of that credit and it will be available until she decides.
- One of the most important is that the interests of the credits are usually higher than that of the loans, so in the end you could end up paying more.
- In loans you have the entire amount from the beginning, so if in the end you do not use it completely, you still have to pay interest on that amount, while in credits you only use the amount you need and the interest corresponds to that amount. amount.
- The line of credit is available indefinitely, you can use it as many times as you want, as long as you have an available balance. On the other hand, the loan is for a single use, once you have finished paying you will have to do all the procedures again if you want to have it again.
- The term to pay the credits is usually less than that of the loans.
WHICH ONE SUITS YOU BEST?
The two financing options are equally acceptable, it all depends on the needs you have and the conditions offered by each one.
For example, if you are going to use all the money from the beginning, a loan would be better for you, since the interest may be lower. If not, you could opt for the credit.
To choose between one and the other, take into account the payment terms, the amount you must pay each month and the interest rate.
At Crédito Maestro we have loans via payroll, without endorsement, with a fixed rate and custom terms.