Loan or Credit?: Two Very Different Products

Although in many cases the terms “loan” and “credit” are used to designate the same type of banking product, the truth is that they are not the same. And while both are aimed at funding funds, they present differences that you should know about.

Although there are sometimes similarities between them, each banking product has well-defined characteristics. And whether it’s the audience they’re focused on, the interest rate they offer or the amount of financing they can access, they all serve a very specific purpose

In this sense, two of the products that most lend themselves to this type of confusion are loans and credits. What are they really? What is the difference between them? What are their similarities? Let’s start with the most basic …

Definition of loan

Definition of loan

The first thing to keep in mind is that a loan is a product through which a financial institution gives you a certain amount of money that you will have to repay.

The amortization of the loan will then be made within a specific period of time in the contract, with the agreed interest and through monthly, quarterly or semi-annual installments.

It is important to consider that the shorter the amortization period agreed upon, the lower the interest you will have to pay.

Loans are usually requested to finance the acquisition of a product or a good.

Definition of credit

Definition of credit

A credit is the amount of money that the financial institution can put at your disposal according to your profile as a client and the risk factor that you represent for them.

Unlike what happens with loans, this amount will not be received at one time , but you will have permanent access to it through your checking account or credit card.

In this sense, you will only have to pay the interest that depends on the amount used.

Main differences between a loan and a credit

Main differences between a loan and a credit

Taking into account the definition of these two banking products, it can be concluded that their main differences are:

Differences between loans and credits

Loan Credit
The requested amount is delivered only once. You can have the amount assigned permanently and at all times.
Its amortization must be made within the period stipulated in the contract. Payment terms can be renewed.
The repayment period is usually quite long (months or years). The repayment period is short (30 or 40 days).
Interest will be paid from the moment the requested amount is granted. Interest is only paid when credit funds are used.
The interests can be quite low. The interests can be quite high.
They are usually requested to finance high-value goods, long-term capital needs or for the start-up of an investment project. They are usually used to keep liquidity needs covered at specific times.
The loan request is made in person. The request can be made in person, via the Internet or by telephone.
The banking entities demand a large amount of documents to process the request. The request can be made without submitting any type of documents.
The waiting times for loan approval can be quite long. On many occasions a loan can be approved in 15 minutes.

Finally, which one to choose?

Finally, which one to choose?

When choosing a product or another there will not be an absolute answer, because everything will depend on your own needs.

If what you want is to buy a house, a car, pay the higher education of one of your children or go on vacation abroad, the most advisable thing, without a doubt, is to resort to a loan.

If, on the other hand, you are self-employed, have a large family or have a small or medium business and you need to have money always at hand, the most recommended will be the credit.

The most important thing is that you determine your needs and analyze which product is more advantageous for you. In any case, you should not forget the important aspects when requesting a loan or a credit and those key points of the contract.