What is the difference between loan and credit?

Credits and loans are products that people and companies contract with banks or financial entities to obtain the financing they need in a certain situation, for example, if they need to make a high payment or pay for their studies, etc.

Previously the person must have decided where he will go, then choose which product will solve his need. In this sense, there are several types of financing and choosing the right one is important: mortgages, credits, loans, are some of the ones that exist.

Many times we confuse credit and loan and speak as if they were synonyms, but in reality they are not the same. They are products with different characteristics, although both could solve your financing problems.

Before making the difference between loan and credit, let’s see what exactly each of these financial instruments is.

What is a credit?

The credit (or line of credit) is a contract between a credit entity and a client, in which it will be agreed that the natural person has a certain amount of money using an account or a credit card; this sum will be available to the client for a certain period of time.

During that time the client will be able to have the amount he needs at any time, be it in a small amount or the maximum credit limit. Interest will be paid only for the amount used, not for all the money available on credit.

The return of the credit is also decided by the client, as it has great flexibility. During the time you use the credit, you can finance it in installments to pay the same day and time you deem appropriate.

What is a loan?

In the loan, the contract between an entity and a client determines the entire operation of the life of the loan. In this case, one of the parties (the financial institution) gives another party (the client) a fixed amount of money at the beginning of the operation with the condition that the borrower repays that amount together with the agreed interest on one or more staggered payments over time.

Typically, these agreed installments are the same amount throughout the life of the loan; However, there is an operation called ‘prepayment’, which is that the client can pay a greater amount than agreed in order to lower the amount of interest or the life of the loan. This is determined by the natural person.

Main differences between credit and loan

  • In the loan, the total amount agreed at the initial moment is delivered. On the other hand, in the line of credit, only the necessary amount is available at any given time.
  • In loans, interest must be paid from the moment the capital is delivered, while in lines of credit, interest will be paid when the necessary capital is available.
  • The line of credit can be renewed several times at maturity, however the loan must be repaid within the agreed term.
  • The term of the line of credit is less than that of the loan.
  • Interest rates are usually higher on lines of credit than on loans.
  • The users of the lines of credit are normally the self-employed and small and medium-sized companies, which need to have their liquidity needs covered at specific times. Meanwhile, the objective of the loans is usually the acquisition of high value assets (for example a vehicle loan), financing of long-term capital needs or the start-up of an investment of a certain magnitude.

What is a credit limit and why is it important?

If you’ve ever used a credit card or line of credit, you probably know you have a credit limit. But what is it exactly? A credit limit is the maximum amount of money a lender will allow you to spend on your credit card or line of credit. However, knowing your maximum limit doesn’t mean it’s a good idea to use it. In fact, by learning how to manage your limit responsibly now, you can improve how much financing you can get in the future on things like a house or a car. This is what you should know.

How do you know what your credit limit is?

The limit is usually listed on your credit card statement or is available through your online account. You can also call the number on the back of the card to ask your provider.

Why is the credit limit important?

Much of your credit score is determined by how much of your total credit you use, which means the balance and limits of all your cards are taken into account when calculating your score. Having a good credit score can influence your ability to get financing on things like a house or a car, start a business, or get certain types of jobs.

It’s always a good idea to keep your credit card balance as low as possible relative to your credit limit. Of course, it’s best to pay your balance in full each month. If you can’t, paying as much as you can above the minimum is still the right way to go.