Difference between loan and credit

The difference between loan and credit lies in time, as well as in the way in which the amount of money is disposed by the debtor.

In financial matters, a loan and a credit share common characteristics. However, the fundamental difference is in the time and manner in which the money is available.

Thus, when the creditor (called a lender ) grants a loan, it does so for a limited time and once. For example, Juan goes to the bank and asks for a loan to buy a car for an amount of 12,000 euros. If the bank ends up granting the loan to Juan, he will give the 12,000 euros at once. Juan, as debtor (called borrower ), must return those 12,000 euros (all the money) plus interest under the established conditions.

On the other hand, when the creditor grants a credit it does not, relative to the time as it happens in the loan and not necessarily all at once. For example, Juana, Juan’s wife, goes to the bank and asks for a loan to go on a trip for an amount of 3,000 euros. If the bank ends up granting the loan to Juana, it will open an account with 3,000 euros available. At that moment, Juana becomes a potential debtor . Why potential? Because if the next day, you decide not to go on a trip and do not use those available 3,000 euros, you should not pay any interest. However, in the case of requesting a loan, you should return the loan plus interest (or cancel it).

Main differences between loan and credit

Once the main differences are limited with an example, we will detail the information even more. Under the previous assumption, it would seem logical to always ask for a loan. When requesting a loan we always have the option of using or not using a part. Of course, this will depend on what it is for. We detail it below:

  • The interests of a loan are usually greater than those of the loans.
  • The amount of credits is usually reduced. That is, they do not offer credits for very large amounts. Therefore, for certain operations, it will not be possible to request a loan, it will have to be a loan.
  • Although the interests are usually higher in a loan, the requirements to access it are usually also reduced.
  • As we have indicated previously, the credit offers us money to dispose of up to a certain limit (amount of the credit), while the loan is given to us all at once.
  • In the credits it is possible to change the payment method. For example, start paying every month and start paying every two months. This modality may also be available in loans, but it is much less flexible.
  • When we make use of a credit and we are returning said credit, the money becomes available again. For example, they grant us a loan of 3,000 euros (monthly limit) and we spend 2,600. If in the next month’s fee we return 600 euros, we will have 1,000 euros (we will have to return 2,000).

Which is better?

There is no better or worse financing. Everything will depend on the needs of each and the conditions offered. There will be companies or individuals that will be better off with a loan and others with a loan.

It could happen, although it is rare, that the conditions of a credit are more favorable (in terms of interest rates) than those of a loan, so before the same amounts we must be attentive.

However, as a general rule, if we are going to use all the money at once, the loan is usually better. Otherwise, credit is usually better. However, it is always important to look at the conditions.

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