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What is the Difference Between Loan and Credit?

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Created on
September 29, 2022


What’s Inside

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! 

What is a Loan?

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.

What is a Line of Credit?

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.

Difference Between Loan and Credit 

The below table shows the difference between loan and credit: 





A lump sum of money borrowed for a specific purpose and repaid in fixed installments with interest.

A pre-approved amount of money that can be borrowed and repaid repeatedly within a set credit limit.

Type of Agreement

Typically a one-time transaction with a fixed term and repayment schedule.

Ongoing agreement allowing for repeated borrowing and repayment as long as the credit limit is not exceeded.


Fixed monthly payments over a specified term (e.g., 5, 10, or 30 years).

Minimum monthly payments, with the option to pay more or the full balance.

Interest Rate

Interest rates can be fixed or variable depending on the type of loan.

Interest rates may be variable and can change periodically.


Used for specific purposes like buying a home (home loan), a car (auto loan), or education (education loan).

Flexible usage, can be used for various expenses like purchases, bills, or emergencies.

Approval Process

Typically requires a credit check and a detailed application process.

Requires a credit check but often has a quicker and simpler approval process.

Collateral (Security)

Loans can be secured (collateral-backed) or unsecured (no collateral). Examples include gold loans (secured) and personal loans (unsecured).

Credit can be secured (e.g., secured credit card with a fixed deposit) or unsecured (e.g., regular credit card).

Fixed vs. Revolving Limit

Loans have a fixed borrowing amount based on the loan approval.

Credit limits can be revolving, allowing you to borrow, repay, and borrow again within the approved limit.


Home loan, personal loan, auto loan.

Credit card, personal line of credit (personal loan on credit card), revolving credit facility.

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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Frequently Asked Questions

1. Which is better, loan or line of credit? 

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.

2. Is a loan considered credit? 

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

3. What do you mean by a loan?

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.


Fi Money is not a bank; it offers banking services through licensed partners and investment services through epiFi Wealth Pvt. Ltd. and its partners. This post is for information only and is not professional financial advice.
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