What is the difference between credits and loans?

The difference between credits and loans

On many occasions, it is common to hear about credits and loans as the same financial product when in reality they are not the same. Users who need money urgently tend to confuse both terms when requesting financing. For this reason, we invite you to learn a little more about the difference between loan and credit.

To know the difference between loan and credit, it is important that we start from the definition and purpose of both forms of financing.

What is a loan?

Definition of a loan:

A loan is a financial operation through which a lender such as a bank or private company offers a fixed amount of money to another person or entity, who must return it within a specified period.

This type of agreement takes place through a contract, where the debtor must return the borrowed money plus interest and commissions, through the payment of monthly installments during the agreed time.

Among the most important types of loans , we can mention:

Loan Type objective Return Term
Microloans Payment of health emergencies, services, rent, tuition, contingencies or repairs. From 30 to 90 days.
Medium-term loans Cover medium-term expenses. 90 days to 3 years.
Installment loans Purchase of a car, premises or long-term project. From 3 to 8 years.
Mortgages Buying a home. From 20 to 30 years.

What is a credit?

Although credits also represent a financing method, their essence is different from that of loans. Through a loan, banks or lenders put at your disposal a fixed limit of monthly money that you can use to face different expenses.

In this case, as long as you pay for what you have consumed, you have that amount of money available at all times to spend . As with loans, you must pay a monthly fee that includes interest and fees.

In addition, nowadays with technological advances, there is a legal regulation of online credits that protects users and their finances.

The difference between loan and credit: key aspects

Once you know the essence and usefulness of both types of financing, we can find differences between both concepts in aspects such as:

Use of the financed amount

In the case of loans, you receive a fixed amount of money only once to cover a specific expense. However, through a credit you will always have available an amount of money in your favor, which you can consume totally or partially each month.

Therefore, within a credit, while you pay your debt you will have money available , instead with a loan, once you pay it you would have to re-enter a request to receive money again.

Return periods

mortgage loan

In loans, there is a certain term where you must finish paying all the money that you financed. Once you receive the agreed amount, with the payment of the monthly fee you return the amount little by little until your debt reaches zero. On the other hand, in loans there is no specific repayment period, but you must pay at least the minimum amount required by the company each month according to your level of debt.

Interest payment

In the figure of the loan, you pay interest for the total amount that you were financed, while in the credits you only pay the interest corresponding to the money you have used , which can be only part of the credit limit.

Responsibility to the company

When you apply for a loan, you see yourself in the obligation to meet the payments for months or years, depending on the amount you request. However, if it is a credit, you have the possibility of enjoying the benefit of always having an amount of money available to cover emergencies , even if you do not use it every month.

Amortization of debt

Generally, when we ask for a loan, we must limit ourselves to paying the agreed monthly installment during the established period. If we want to pay more money to get out of debt as soon as possible, the company may apply some commission for early repayment . This does not happen in the case of loans, where you can pay the full amount of your debt at one time and exceed the minimum monthly payment to reduce your debt if you wish.

Debt risk

Although the credits do not present limitations when it comes to repaying the debt at once, they represent a greater risk of debt if they are not used with awareness. This is because people know that they have a fixed amount of money every month and even if they amortize the payment, the money is available again and the credit limit can even be extended.

In this way, it depends on the self-control and discipline of the person to try not to go into debt in unnecessary expenses through credits . On the other hand, with a loan, you acquire the debt only once and it cannot grow more than the amount you requested, so you would only focus on returning the money plus interest, without the risk of getting more debt along the way.

When to ask for a loan or credit?

loan or credit which is better

It is advisable to ask for a loan if you want to have a backup when it comes to covering recurring expenses of daily life such as paying rent, services or repairs and you need immediate liquidity. In this way, a loan can give you a little more time to pay for consumer items and still have the money available next month.

Loans, on the other hand, are designed to cover specific expenses or emergencies and even achieve long-term projects , where you need large amounts of money to pay for a home, business, or a loan to pay for a car , although you can always access microloans if it comes to short-term situations. As a new client, you can take advantage of the fact that many lenders grant the first loan for free .

In this way, if you need one-off financing for a specific project , it is best to go to the figure of a loan. However, if you have a stable income and need more time to pay certain fixed expenses, a loan could get you out of trouble as long as you maintain a healthy debt level that you can cover with your salary.

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