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Difference Between Loan and Credit Explained

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Difference Between Loan and Credit Explained

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Personal financing takes on varied forms. Among these, loans and credits are worth noting. When examining the difference between loans and credit, there are a number of parameters to consider. These have been touched upon in the article below.

Before going any further though, it is important to understand that both credits and loans are banking products that make capital accessible to borrowers. They differ in terms of their objectives and definitions.

Understanding loans

A loan is a financial product that provides a borrower with a predetermined amount of money with a promise to repay the amount after a certain period of time. The loan is given based on the understanding that this amount, along with agreed-upon interest, will be returned to the lender within a certain time frame. This repayment must be made in the form of monthly instalments.

Once the entire amount owed to a lender has been repaid in the form of instalment payments, the operation comes to a close. No additional funds will be made available to the borrower unless they sign up for a new loan.

Time Frame

All borrowers must be aware of the expiration date on their loan transactions. It isn’t uncommon for loans to extend over a long time frame which can amount to several years. The amount of money extended under a loan is determined by keeping in mind the borrower’s creditworthiness and their need. Creditworthiness is simply the bank’s understanding of how likely the borrower is able to repay the loan.

Types of Loans

Loans exist in the following two forms.

1. Secured Loans

Here, money is extended to the borrower as they provide some form of collateral. This is ordinarily the same asset that’s been used to avail of the loan. For instance, a home loan is secured by a house. If you fail to meet the financial obligations tied to your loan and default it, your lender will be entitled to repossess your house, sell it, and use the proceeds to get the remainder of the loan you failed to pay. 

2. Unsecured Loans

These loans aren’t backed by any form of collateral. They are ordinarily approved based on your credit history alone. Unsecured loans typically offer a lower amount of money and have a higher interest rate linked to them in comparison to secured loans. But this could vary bank-to-bank or lender-to-lender. 

Understanding Credit

Credit is essentially money you don’t yet have. Think of it as an interest-free cash advance that you can use for payments only. It provides you with more flexible financing as it permits you to access the money you need keeping in mind your needs at any point in time. That said, there is a limit imposed on the amount of money you spend however it can be used in part or in full. Here, you are entitled to use the entire amount of money available, a fraction of it or not use it at all. 

Expenses Charged

Lines of credit are ordinarily linked to higher interest rates than loans. Despite the fact that interest applies only to what’s been spent on this card, there may be a minimum fee that’s applied to the amount of money that remains undrawn.

Limits Imposed

Lines of credit provide you with more money once you return what you owe so long as you don’t exceed your limit. This limit is determined at the time at which you’re approved for a line of credit. Since this credit limit can be used in its entirety or in part on a repeated basis, it allows for more versatile borrowing. 

Lines of credit function in a similar manner as credit cards and can be accessed as per your needs. This holds true so long as your account is current and you have available credit that can be used. 

Personal Loan and Credit Card 

Choosing between a personal loan and a credit card may seem tricky. The table below talks about how the two are different.

Final Thoughts

While looking at the debate regarding personal loan vs credit card, interest rates are always brought up. This is because these rates impact the final amount a borrower is expected to repay. Always make it a point to assess your financial needs before availing of either of these forms of borrowed capital. Moreover, understand the terms and conditions attached to each of these before making any decision.

Frequently Asked Questions

1)Is a loan considered credit? 

Yes, loans are considered to be a form of credit.  

2)Is a loan better than a credit debt? 

Whether or not a loan is superior to a credit debt depends upon your need. For instance, credit lines provide flexibility as far as smaller expenses go. However, loans are much more viable for expensive, one-time purchases. 

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