What is the difference between credit and loan?

With credit we are talking about a way of financing the payment of your purchases; loans are usually granted to finance a good or service…

In general, there may be some doubts about the differences between a credit and a loan, since it is the possibility of accessing a certain amount to be able to acquire some good or service. In order to understand the differences between them, it will be necessary to understand each term in particular.

What is a loan?

A loan is a financial operation in which a certain financial entity, called a lender, gives a user an amount of money at the beginning of the operation, with the condition that the money be returned together with the agreed interest within a previously determined period of time.

The loan itself is a contract that is perfected with the delivery of the money by the financial entity. And it can be formalized before a notary public so that, in case of default in the payment of the same, the seizure and the possible execution of the debtor’s assets can proceed without a judicial process being necessary.

The latter will depend on the amount requested and the conditions previously established by the granting financial institution. The amortization (repayment) of the loan is normally made by means of regular installments, whether fortnightly, weekly, monthly, quarterly or half-yearly.

What is a credit?

In general, when you apply for credit, we are talking about a way of financing the payment of your purchases. The repayment takes place later, during a period of time agreed with the creditor, and the payment options offered by the entity that granted you the credit (either in fixed installments, interest-free months or revolving charge).

Main differences between loans and credits

Here we summarize the most important ones, to understand how each type of financing works:

  • In loans, interest is charged on the total amount of money borrowed, while in credits, the client only pays interest on the money actually drawn down, although a minimum commission is usually charged on the undrawn balance.
  • When accessing a credit, the client is not given that amount all at once at the beginning of the operation, but will be able to use it according to his needs, making use of his account or credit card. In loans, the money is usually deposited for immediate availability and use.
  • By making timely payments and making constant use of the credit, the limit can be extended, so that the client can make use of it and renew it, without exceeding the limit of his credit.
  • The interest on credit is usually higher than that of a loan, however, it is only paid on the amount used, whereas in the case of loans, the amount of interest to be paid is stipulated from the beginning of the contract.
  • Loans are usually granted to finance the acquisition of a specific good or service: a car, studies, a home renovation, etc. Credits are used to cover collections, payments and purchases and are usually used when there is a lack of liquidity in the user’s personal finances.