What are the differences between a loan and a credit?

There are many expenses that we have to face in our day to day. No longer just the children’s car, house or school, but one vacation a year or even a second home or a second vehicle. Although most expenses can be paid with our disposable income, there are some for which we need to get into debt.

This debt is the way in which anyone can postpone expenses that, due to their high amount, they cannot pay at once. There are several instruments with which citizens can get into debt that generally, especially if we are talking about consumer spending, are usually summarized in credits and loans.

These are two concepts that are easy to confuse.

These are two concepts that are easy to confuse.

It is common for the terms credit and loan to be used interchangeably on the street to refer to a situation in which the final outcome, in both cases, is the same: obtaining an amount of money with the obligation to return that amount in a period of time together with the interests established in the contract.

Although their daily use may seem synonymous, there are a number of characteristics that make a very clear difference between the two:

A credit is an amount of money, with a limit set in advance, that an entity makes available to a customer, usually in a credit account or on a credit card. The client is not given that amount at once at the beginning of the operation, but deliveries are made partially and always at the request of the client. As for interest, they will only be paid for the part of the balance drawn, although it is true that for the rest of the amount most banks usually charge a commission for the unused balance. Credits are granted over a period of time, but unlike loans, they can be extended or renewed. It should be noted that the interest on loans is usually higher than that on a loan.

A loan, on the other hand, is a financial operation in which an entity or person (the lender) delivers another (the borrower) a fixed amount of money, previously requested by the borrower at the beginning of the operation. The borrower will have to return that amount plus the interest generated in a previously agreed term. The loan is repaid over a specific series of periodic installments, which can be monthly, quarterly, semi-annually, etc. Interest is charged on all the money loaned.

The three fundamental differences between a credit and a loan are, therefore:

The three fundamental differences between a credit and a loan are, therefore:

  1. Payment of interest. In a credit, only interest is paid on the effective balance used (despite the fact that the rest of the requested balance will have a bank commission associated with it). In a loan, interest is generated on all the capital requested, regardless of whether it is used effectively or not.
  2. Capital deliveries. In a loan, the amount is delivered in installments agreed or requested by the borrower to the bank, while in a loan the amount is delivered in full at the beginning of the operation or at the signing of the contract.
  3. Return terms. A credit can be renewed several times once it has expired, while a loan must be repaid within the term established in the contract. Once returned, a new one can be requested, with a new term.

As a general rule, credit is consumer oriented, while the loan is more oriented towards other investment elements or products of a lasting nature such as the purchase of a home or the purchase of commercial premises.

In short, loans are oriented towards the acquisition of certain assets, while credits, for their part, are ideal when any of us has temporary liquidity needs without evaluating whether this money will be used in the short term or not.

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