What is loan, credit and the differences between the two

 

What is loan, credit and the differences between the two

There is a lot of confusion between what a loan is and what a credit is. Here we will explain the difference between them in a simple way.

Loan Definition

Loan Definition

A personal loan is an amount of money that a financial entity grants to a natural person with the promise that the individual will return the money within a certain period agreed between both parties.

When requesting a loan, it is important to know these concepts:

  • Lender:
    It is the financial entity that has the money and grants it in the form of a loan to the borrower.
  • Borrower:
    It is the natural person who receives the money and must return it.
  • Loan:
    It is the total money that the financial institution grants to the natural person.
  • Interest:
    It is the additional amount to the loan that the borrower must pay the lender each month. There are many types of interests, some apply per month and others per year; It is very important to know which one will apply in the contract.
  • Payment Period:
    It is the time that both parties agree for the total payment (amount + interest) to be paid.
  • Warranty:
    Many financial institutions ask for a property or a person as collateral that offers the same (or approximate) value as the loan requested.
  • Requirements:
    They are all documents and personal data that the lender requests from the borrower before approving the loan.

If the loan includes a guarantee and the debt cannot be paid, the guarantee becomes effective. The lender would take possession of the property (or the guarantor would have to take over the payment). That’s why you should always be careful to ask only what you can afford.

Credit Definition

Credit Definition

A credit is money that the financial institution makes available to the person. It is usually offered through a credit card or a bank account.

It is important to know that in a loan, interest is generated based on the amount of virtual money used.

Differences between loans and credits

Differences between loans and credits

To make clearer the main differences between a loan and a credit we present the following table:

Characteristic Loan Credit
Money delivery The entire amount is delivered together at one time. There is an amount of money that can be used or not.
Renewal It is not automatic. Automatic
Payment period Fixed. It depends on the case (it can be a single payment or in several installments).
Interest rate Lower (normally). Higher (normally).
Warranty It is usually demanded. They can be granted only with the credit history of the person.

We hope the concepts have become clearer to you now. You can always leave a comment if you have questions.

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