Many times when consulting data on financial products two words appear that are sometimes confused. We talk about the terms credit and loan. Although sometimes they are used as synonyms, the truth is that they are not. There are differences between both concepts. At Spin Lender we are going to explain why a credit and a loan are not the same. This way you will know that you are hiring every moment. If you are interested in knowing more about it, be sure to read the following post. Go for it.
A credit and a loan, are they the same?
As we advanced a few lines above, a credit and a loan are not the same type of financial product. In order to know precisely the differences between both products, it is best that we read a description about each of them.
Characteristics of a credit
When we talk about a credit we do it to refer to a financial service in which a line of credit is opened to us. What does this mean? That we reach an agreement with the corresponding financial institution through which we will have a maximum amount to spend during a certain period of time. In this period we will have access to that capital and we will have access to it at any time. Although it will not be visible in our current account as it happens with loans. One of the most frequent and probably well-known credit products is the credit card. You know you have a maximum amount each month to spend, but physically the money is not in your account.
What is a loan
Loans are financial agreements between two parties: the lender and the borrower. The first can be from a traditional financial institution, such as a bank, to a private equity company or a private lender. In this type of agreement, a preliminary study is made of the amount of money the borrower needs together with the reasons, and certain interests and a specific repayment period are set. Unlike the case of credits, the loan is a capital that does appear in our current account. In other words, if we ask for $ 10,000 to fix our house and they grant them to us, the lender will deposit them in our current account.
The borrower undertakes to repay the borrowed capital in a series of installments over a specified period. These installments include the interest rate agreed between both parties.
Differences between a credit and a loan
Perhaps the most obvious differences between a credit and a loan are the following:
Interest payment is different for both financial products.
- The loan is integrated into the monthly payments that we pay for having obtained the money. The amount is proportional to all the amount they have loaned us.
- However, in the case of credits, we will only pay interest for the amount we spend, not for the entire line of credit that we have been granted.
The borrowed money
As we explained a few lines above in a loan, we will see the money that we have requested directly entered into our current account. However, in the case of credits, it will not be physically available to us. Rather, we will have access to it whenever we need it. The use of lines of credit is quite common in companies, as it is a way of having liquidity at all times.
The return period
Loans usually have longer repayment terms. These increase depending on the amount of money requested. The higher it is, the longer the agreed time to return it.
In the case of credits, however, it is normal for there to be short deadlines for repaying the principal. This is usually established between 30 and 40 days.