20 Apr Difference between credit and loan
When it comes to finance, it is very easy to get it wrong and confuse concepts like those of credit and loan. That’s why today we want to clarify your doubts, explaining to you what is a credit, what is a loan and how do they differ.
WHAT IS A CREDIT?
A credit is a form of financing that allows us to access a loaned amount of money at any time, according to our needs. What characterizes the credit is that it establishes a maximum limit of money on loan and the customer can use it in whole or in part.
The most common example of credit is the credit card which is characterized by having a specific credit limit that the borrower can use to make purchases, with the promise to pay monthly the balance spent to continue using it.
WHAT IS A LOAN?
Instead, a loan is an agreement between two parties: a lender (a bank, or any financial institution) who lends an amount of money to a borrower (customer or beneficiary) who obtains the loan and undertakes to repay it within a set term, generally against payment of interest.
Loans generally have 4 main characteristics: principal, interest, term and amount of the payment.
Base capital: refers to the amount of money that the borrower borrows from a lender.
Interest: refers to the interest a borrower has to pay when taking out a loan, i.e. the amount of money he has to pay back, in addition to the principal borrowed. The interest rate is determined based on several factors such as: credit score, loan rate, how long it takes to pay the loan.
Canon: are the payments that the borrower must make to repay the loan.
Maturity: the maturity of the loan is the amount of time the lender has to pay off the loan in its entirety.
Understanding each of these points will help you decide if a loan is right for your needs.
Types of Loans
Loans are divided into two broad categories: secured loans and unsecured loans.
In this type of loan, the lender uses a physical asset (house, car) to insure his money if the borrower is unable to pay the loan as agreed.
Secured loans generally have lower interest rates than unsecured loans.
In case of unsecured loans, the lender bases its interest rate solely on the borrower’s credit rating and credit history. If the lender does not repay the agreed loan, the lender cannot seize any of his assets, but he can report the default to the credit bureaus, which will compromise his credit rating and his ability to obtain another loan in the future..
This is why unsecured loans usually have higher interest rates than secured loans.
Examples: A student loan for education, a payroll loan, or a personal loan.
Difference between credit and loan
Now that you know the main features of Credit and Loan, you just have to know the differences between loan and credit most significant.
- The most obvious difference is that the interests of the credits are generally higher than those of a loan. In fact loan it is usually used to gain access to large amounts of money (such as to finance the purchase of a house, a car or a project we are undertaking). This makes the interest total higher.
- Credit is generally renewed annually so that the customer can continue to use it while the loan is used to finance expenses with a longer maturity and provides for repayment dates. The customer has a total amount from the beginning of the agreement until its end.
- Interest on the credit is paid only on the amount used. In the case of a loan, interest is paid on the total amount lent.
- The usual ways of obtaining financing through a credit are credit cards, credit lines, generally managed through a current account.
These are the main differences between credit and loan. If you decide to take out a loan for educational purposes or to buy a house or to finance a long term project, you don’t have to worry. We only advise you, before applying for a long-term loan, to make sure that you can pay all the monthly installments, even in the event of a lack of liquidity to meet a debt (loss of work, unexpected purchases that leave your account in red).
If, on the other hand, you prefer to ask for credit to finance your monthly purchases, then the best solution is to ask for a credit card because, even if you have to pay back the amount you spend monthly, it will give you greater control of your movements and will allow you to pay your bills when necessary. And of course, this is only achieved if you learn how to use a credit card wisely. For this, don’t miss our post on How to use your credit card? 5 tips.