What will you find here?
The loans and the credits They are different financing mechanisms. Both are banking products that provide capital to the borrower, but they differ in their definition and objectives. A loan gives the client the money in one go, upon approval. A credit allows the bank to make the money available to the client, who can use it when needed, and have any amount.
Differences between loans and credits
A loan gives you the money you need right away. A credit allows you to borrow money, which you can access when you need it. You can use all the credit, or none. The repayment of the loans is made through periodic installments. Between the main characteristics of a financial loan is it so:
- The operation has a previously established expiration date.
- Once the capital is fully amortized through monthly payments (monthly, quarterly, semi-annually…), the operation is considered finished and no more money can be accessed.
- Loans are not free.
- The longer the loan, the higher the interest.
A bank loan is a much more flexible way of accessing money. It allows you to borrow as much as you need at any given time. A loan places a limit on the amount of money you can get, but within that limit you can borrow some or all of it.
You never know how much cash the customer is going to spend. You may use the entire amount, you may use only a small portion, or you may not use it at all. Let’s see the most important characteristics of a credit that differentiate it from a loan:
- Interest rates on loans are usually higher than those on credit cards.
- Interest is only paid on the amount used, although there may be a minimal charge for the unused balance.
- As you return the money, you can continue to use more, as long as you do not exceed your limit.
- Unlike the loan, the credit is renewed each year so that the client can continue to use that line of credit when needed.
The most common forms of obtaining financing are credit cards and loans. The credit card is usually linked to a bank account in which deposits and withdrawals can be made up to the limit of the loan.
Companies often resort to credits to cover cash gaps and finance purchases. They also use the loans to purchase capital goods and establish lines of credit.
when you need a loan to cover some extraordinary expense, you may be wondering what the difference is between a loan and a line of credit.
Let’s talk about banks. In principle, the objective of each one is the same: that you have the money you need. However, the conditions are different for each. For both cases there are two parties involved. The creditor or lender is the financial institution that grants the money, and the debtor or borrower is the one who benefits.
Loan functionality
The lender It delivers a certain amount of money, which is delivered to the debtor immediately and must be returned within a certain time, together with the interest generated by that sum. The lender and the borrower agree on all the conditions of the loan: when it must be repaid, whether it will be in installments, and the amount of each payment.
For example, Ana asks for a loan of 25,000 dollars to buy a new computer. The bank gives her the money and she has it instantly. Ana agrees to pay the bank in 12 monthly installments, so each month she must cover a part of the debt plus the accumulated interest.
Operation of the credits
When the creditor issues a line of credit, gives the debtor a certain amount of money available to withdraw. The debtor does not have to use all the available money when it is issued. For example, Ana was issued a credit card with a credit limit of $20,000. She decides to buy a new phone, but she only uses half of the available credit, so the interest and repayment of the loan will be only for the amount she spent.
A customer may not use that credit immediately and the credit will be available to him when he needs it.
What are the differences between credits and loans?
- One of the most important things to remember is that the interest rates on credits are usually higher than those on loans, so in the end you may end up paying more.
- In a loan, you have to pay interest on the entire amount up front. If you do not use the entire amount, you continue to pay interest on it, while in a credit you only pay interest for the amount you have requested.
- The line of credit is available indefinitely, you can use it as many times as you want, as long as you have available funds. Instead, the loan is for a single use, once you have finished paying your debt you will have to go through all the procedures again if you want to access it again.
- The credit conditions are usually better than those of the loans.
What is better for me, the loan or the credit?
There are two financing options. It all depends on what your goals are and what each lender offers. For example, if you are going to use the money right away, a loan is better because you will pay less interest. If not, a loan may be the most suitable for you. If you want to choose between one and the other, keep in mind the payment terms, how much you are going to pay each month and the interest rate.
When it comes to financing, there are many options. However, there are differences between them that you should be aware of. The main difference between them is that credit lines are requested as they are needed. A loan, on the other hand, is granted at the beginning.
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