In the area of economics and finance it is very common to use the word credit as a synonym for loan and vice versa.
But although we think that they mean the same, they have a series of differences that the company must know when requesting financing, in order to choose the product that suits you, either the loan or the credit.
Credit and loan, what are they?
What is a loan?
When we refer to a loan we are talking about a financial operation in which the lender, which can be a bank, company or individual, delivers a certain amount of money to a borrower on the condition that said amount is fully repaid. within a previously established period. Interest is added to the repayment of the loan, which represents the price the borrower pays to receive money borrowed from someone else.
What is a credit?
Business credit refers to the amount of money an entity grants to its client. In this case, the customer is the one in charge of managing their own money, that is, the company itself will decide how much money it uses within the amount that has been approved.
Credit and loan, differences
Requested amount of credit and loan
The amount of credit and loan is requested differently. The amount in the loan is fixed in advance and received by the borrower or applicant in full. On the other hand, in the case of credit, an amount is requested which can be used according to your needs. Once the amount accepted in the credit is reached, an extension could be requested.
Credit and loan terms
In the case of the loan, the term and type of repayment is fixed in advance, being fully paid back at the end of said term. In the case of credit, an amount is granted that can be arranged in a term. At the end of that period, credit renewal or cancellation will be negotiated.
The difference in interest between credit and loan
The way to apply interest to credit and loans differs. Interest on loans is applied to the total amount of the amount borrowed, regardless of whether it is used or not by the borrower. The opposite happens with the credits, it will be possible to negotiate to pay only for the arranged thing (that is to say, for what you use) or to pay a little for the available thing but not also arranged.
On the other hand, the interest on loans is usually lower than on business credit.
Credit and loan amortization
Credit and loan repayment are carried out differently. In the case of the loan, repayment is usually carried out periodically (monthly, quarterly …) throughout the term of the loan. However, in the case of credit there is the concept of amortization, since only interest will be paid for the amount that has been used (and for the amount available where appropriate).