In this blog, we're about to demystify the age-old conundrum: Loan vs. Line of Credit. No jargon, no confusion – just a straightforward guide to help you understand the key differences between loan and credit. Let's get started!
A loan, typically an installment loan, involves a lender providing a lump sum of money that you must repay with interest in regular, equal payments over a specific period. Loans are often used to finance larger expenses like homes or cars. Common types of loans include mortgages, auto loans, student loans, personal loans, and small business loans.
A line of credit is a revolving account allowing borrowers to withdraw and spend money up to a predetermined limit, repay it (usually with interest), and use it again. Credit cards are a common example, but home equity lines of credit and business lines of credit are also available.
The below table shows the difference between loan and credit:
Keep in mind that the specific terms and conditions may vary depending on the financial institution and the type of loan or credit product.
While looking at the debate regarding differences between loan and credit, 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.
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In general, loans are suitable for substantial, one-time investments or purchases, such as buying a house or funding education. Lines of credit are more suitable for ongoing, smaller, or unexpected expenses, as well as managing income and cash flow. For example, a small business owner might use a credit card to cover monthly office supply costs, while a homeowner might use a home equity line of credit for fluctuating renovation expenses.
Yes, loans are considered to be a form of credit.
A loan, typically an installment loan, involves a lender providing a lump sum of money that you must repay with interest in regular, equal payments over a specific period.