Do you know what difference there is between a loan and a credit?
It is likely that at any given time you will have the need to raise capital to face some type of payment. Whether it is an unforeseen event or any other type of management. It is in these cases when one begins to seek advice on the different options at hand to obtain liquidity. Among the main ones you will have to face is choosing between a loan or a credit. Surely both terms do not sound unfamiliar to you, but do you know how they differ from each other or which is the most advisable for your specific case? From private lenders we want to help you clearly differentiate between the two concepts. This will make it easier for you to decide on one financial option or another. Let’s start.
What is a loan?
A loan is understood to be a financial operation where a lender (which can be a financial entity, such as a bank, or a person, such as a private lender) delivers a fixed amount to a borrower at the beginning of an operation. In exchange, the borrower must return the total amount plus the interest generated by said loan.
To pay off the loan, terms are set between the lender and the borrower, which can be monthly, quarterly, semi-annually to make the repayment effective. In other words, the operation is signed knowing when it begins and when it ends. Most of the time loans can be reduced in time or in capital.
What is a credit
Credits are relatively similar to loans. In general, we can define a credit as that operation through which an entity makes an x amount available to the client. Unlike the loan, in the case of credits, the entity makes partial deliveries of the requested capital as requested by the client. In other words, the amount does not have to be paid immediately upon starting the operation. As in the case of loans. The client may dispose of all the money granted, a part or none. Normally, the client pays only interest on the capital that has been credited by the financial institution.
The common thing, however, is that a minimum commission is always charged on the pre-granted balance. Surely this technique is very well-known to you if you have a credit card. You have a pre-granted capital that you can use and that is replenished as you return the capital borrowed and the interest that it has generated.
One of the peculiarities of loans is that their interest tends to be higher than that of loans. However, there is no need to pay any interest if the money is not used. And interest is only paid based on the money used.
When is it better to use a loan and when a credit
As a general rule, loans are more useful when we have to acquire a specific material good or service. For example when buying a car or a home. Credits are most used when immediate liquidity is required or when there is a gap between payments and collections. In those cases, and in a timely manner, it is recommended to ask for a loan to solve this situation of lag.