The Difference between Credit and Loan

Loans and credit are types of bank financing. But what are loans and credit? Credit is money given to you to help solve your needs and can only be accessed in bits that allow you to use some, all, or none of the money allocated. A loan is money given to you in full at completing and accepting loan terms and agreements.

They are both forms of financing with Interest rates associated with them.  The major difference between them is the amount available per time and the interest rates involved. Below we define each of them starting with credit.

Types of Credit

There are two main types of Credit categories;

Open-end Credit and Closed Credit

Open-end credit

It is also known as revolving credit. In this type of credit, money is available to you monthly, provided you do not exceed the agreed amount. Interest rates are usually charged on the amount used in that particular month and not the available amount. The interest rates usually depend on the amount of money borrowed and your repayment.

Closed Credit

This type of credit allows for a specific amount of money to the consumer, which they can use over a specific period and is usually available in installments. The consumer must pay in full the amount used in a particular month, and interest rates are charged for any unpaid amounts.

The biggest difference between Open-end and Closed is the amount of time the credit is available to the consumer. Open-end is available to the consumer monthly, but the closed-end is only available for a specific time and is usually only used for a particular purpose.

Types of Loans

There are two main categories of consumer loans;

Secured Loans and Unsecured Loans

 

• Secured Loans

 

Secured loans mean that you have to put an asset as collateral to receive a loan. The collateral is usually equal to or more than the worth of the loan you are to receive. The collateral acts as security to the lenders in case you default. They will sell your assets to recover the money owed.

 

• Unsecured loans

 

This type of loan doesn’t require you to give up your assets as collateral to receive the loan. It, however, means that the loan you receive will have higher interest rates. This is to give lenders security of their money in the chance that you default.

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Consideration before Choosing Credit or Loans

 

• Amount of Money Needed

 

Credit usually provides less money spread out over some time. If you require only small amounts of money for inexpensive purchases, then you should consider credit.

On the other hand, loans give one a large amount of money that one can use for a bigger project or an expensive purchase that one cannot afford at a single time. Loans are used for things such as mortgages or buying a car.

 

• Interest rates

 

Although credit only charges interest on money used and not repaid on time, the interest rates are usually very high. They can go to as high as 30% and aren’t usually fixed but depend on credit score and previous repayments.

Loans usually have fixed and low-interest rates. If you consider a huge purchase and don’t want the extra interest rates, then a loan is preferable.

 

• Repayment Period

 

Credit usually expects one to pay back the money whether it is full or just the required minimum by the end of each month. The payment period is short and only works for small amounts of money borrowed that is easily payable.

Loans usually take a long time to pay back the money. The period might range from a few months to years, depending on the amount borrowed and the consumer agreement with the lenders.

 

• Purpose of the Money

 

Why you require the money will determine the urgency, amount, and whether you go with credit or loan. If you don’t need the money but would like to have access to it in case of an emergency, you are better off going with credit. If you want to purchase something, then getting a loan will be the better option.

Final Thoughts

Credit and loans are both costs that should be taken when necessary. You should take special considerations before taking any of them and only take the one that doesn’t inconvenience you and best suits your needs.