Difference Between Loan and Credit

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

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

Thus, when the creditor (called the lender ) grants a loan, it does so for a limited period of time and all at 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 him the 12,000 euros all at once. Juan, as a debtor (called borrower ), must repay those 12,000 euros (all the money) plus interest under the established conditions.

For its part, when the creditor grants a credit, it does not do so, relative to the time as it occurs 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 credit to Juana, she will open an account with 3,000 euros available. At that moment, Juana becomes a potential debtor . Why potential? Because if the next day, she decides not to go on a trip and does not use those 3,000 euros available, she will not have to pay any interest. However, in the case of having requested a loan, she should repay the loan plus interest (or cancel it).

Main differences between loan and credit

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

  • The interests of a credit are usually higher than those of the loans.
  • The amount of credits is usually small. 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 also usually lower.
  • 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 gives us everything at once.
  • In the credits it is possible to change the payment method. For example, start paying every month and go on to pay every two months. This modality could also be available in loans, but it is much less flexible.
  • When we make use of a credit and we return said credit, the money becomes available again. For example, they grant us a credit of 3,000 euros (monthly limit) and we spend 2,600. If we return 600 euros in the following month's installment, we will have 1,000 euros (we will have 2,000 left to return).

Which is better?

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

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 with the same amounts we must be vigilant.

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.