Loan and Credit are terms which we are used to seeing. However, most people don’t know the differences between them, despite being in contact with them almost every day. If you have requested a loan and have used credit before, you may be aware of them. Through today’s post, we will tell you the differences between them. Although they are offered by banks, they are different products.
What is a Loan?
A loan is a process where two sides are involved; these are a lender and a borrower. The lender can be either the bank itself or a person, and they give a determined sum of money to the borrower, applying some kind of interest. Among the main characteristics of a loan, we can mention:
- The whole amount is provided to the borrower, and interest is calculated over the total sum.
- Both sides should arrange the timeframe which the payment must be done, as well as the way it will be done. For example, you can request monthly or biannual payments.
- Therefore, a loan is always paid through previously established fees which are accorded by both sides.
Why is interest applied to certain transactions?
Financial entities basically sell money to the public. Let’s say you request a loan to a bank, and you want to pay the total sum in just one payment. While this seems like a good idea, it doesn’t work to this kind of financial processes because the bank will request compensation, which is why interest is applied to loans. For said reason, payments are done through fees in a determined amount of time. To put it easier, you’ll be paying the lender the amount they have lent to you, and the favour which you have requested.
Money has a price. The fact it is used every day for purchases doesn’t take said value out of it. When you request a loan, you can say ‘the price’ of it is the total interest you are paying to the lender.
What is Credit?
When you have credit, it means the bank has put a determined sum to your disposition. When you use it, it must be paid with interest. The main characteristics of credit include:
- When you can use credit, a certain amount will be available. It can grow over time.
- The money can be used to fit your needs, and the whole amount is not provided.
- Interest is not applied to the total sum, but to the amount which is used. While you’re paying for the credit, you can still use it.
Differences Between Loans and Credit
Although both terms are very similar, as you may have noticed, there are certain differences. One thing they have in common is they make the person who requests it to use a certain amount of money they don’t have and pay it in a determined timeframe. Now, let’s see what the differences between loan and credit are:
- When you request a loan, the total sum is provided and cannot be changed unless you request a new one.
- When you request credit, you have a certain amount of money available for use, and a limit exists. However, the person can use the money which needs to be used anytime. When it comes to credit, payments can be done easier.
- Overall, the interest applied to credit is only to the sum which was used. When you request credit, you pay interest calculated over the total sum.
Learning about the different financial terms will help you to have better management of your finances.