If at any time you need to access financing to cover certain extraordinary expenses, you may be wondering what the difference is between a loan and a line of credit.
In principle, the objective of both is the same: that you have the money you need. However, the conditions of each are different.
In both cases, there are two parties involved. The creditor or lender is the financial institution that grants the money and the debtor or borrower, who is the beneficiary.
HOW A LOAN WORKS
The creditor grants an amount, which is delivered from the first moment to the debtor and must be returned in a certain time, together with the interest generated by that amount.
Both parties agree to all the conditions of the loan: the time in which it will have to be repaid if it will be done in installments and how much each of the payments will be.
For example, Anyone requests a cab loan of 25,000 pesos from a bank to buy a new computer. The financial institution grants the money and at that moment she has the cash.
Ana agrees with the bank to return the money in 12 monthly installments, so each month she must cover part of the debt plus the interest generated.
AND THE CREDITS?
In this case, the creditor grants a line of credit, with a limit amount, which the debtor can access at the time he deems convenient and does not have to use all the money available.
An example would be that Ana was granted a credit card with an available balance of 20,000 pesos.
She decides to buy a new phone, but she does not use all the available money, only half, so the interest and the credit payment will be only the part that she spent.
It may even be that she decides not to make immediate use of that credit and it will be available until she decides.
MAIN DIFFERENCE
- One of the most important is that the interests of the credits are usually higher than that of the loans, so in the end, you could end up paying more.
- In loans, you have the entire amount from the beginning, so if in the end, you do not use it completely, you still have to pay interest on that amount, while in credits you only use the amount you need and the interest corresponds to that amount. amount.
- The line of credit is available indefinitely, you can use it as many times as you want, as long as you have an available balance. On the other hand, the loan is for single-use, once you have finished paying you will have to do all the procedures again if you want to have it again.
- The term to pay the credits is usually less than that of the loans.
WHICH ONE SUITS YOU BEST?
The two financing options are equally acceptable, it all depends on the needs you have and the conditions offered by each one.
For example, if you are going to use all the money from the beginning, a loan would be better for you, since the interest may be lower. If not, you could opt for the credit.
To choose between one and the other, take into account the payment terms, the amount you must pay each month, and the interest rate.