There are different situations that can make you need extra money. A medical emergency or an accident may cause you to have expenses that are difficult to cover with your income level. You may even need to purchase an item, but you don’t have enough money at the moment. In these situations, you have the options of applying for a loan or credit. If you’ve ever been in a situation like this, you’re probably familiar with the terms.
Although the ideal is to manage your money well so you don’t get into debt, there are certainly situations that are out of your hands. But in these situations, you need to know the difference between a loan and a credit. Having a clear understanding of the definitions of these options will help you decide which one is best for the specific experience you’re going through. Here we will try to explain in simple words the most important differences between loans and credit.
Loan and credit: how are they similar?
Before we clarify the differences, we want to make it clear how the two definitions are similar.
When you ask for a loan or credit, a third party will provide you with a certain amount of money. This third party can be a bank, a company or an individual. In either case, there will be differences between a loan and a credit in terms of how the money will be received, how the payments will be made, among other aspects.
So what are the differences between a loan and a credit?
How the borrower receives the money
When you apply for a loan, you agree with the lender on the amount of money you will receive. Usually, the lender will give you the full amount at the time you agree to the loan. On the other hand, when you apply for credit, you will receive the amount you requested in installments.
Loan and Credit Payments
Loan payments depend largely on the terms agreed upon between lender and borrower. However, it is common to agree to pay in installments over a set period of time. It’s important to know that you may not be able to apply for more money on a loan until you finish paying off the initial loan.
Credit payments are also usually paid in installments. They are also paid over a pre-determined period of time in the repayment agreement. However, credit has one particular feature. If you pay your credit payments on time, you can apply for more money. For example, if you use a bank’s credit card, you will have a limit on the amount of money you can use. If you use part of that amount and pay it back within the time frame in which you are supposed to, you will have that same amount available to use again.
You will probably have to pay interest, regardless of whether you apply for a loan or credit. In both cases, you will need to agree on the interest rate with the lender at the beginning of your application. However, the way you will have to pay the interest is different. In the case of a loan, interest will be calculated based on the amount you were loaned. It doesn’t matter if you use the full amount or not. In other words, the interest to be paid will be a fixed amount.
If you applied for a loan, the interest will be calculated based on the amount of money you use. And, in fact, the amount will probably be recalculated as you pay off the loan. If you can pay more than the minimum amount of each installment, you will end up paying less interest.
Whether you ask for a credit or a loan, you will have a determined period of time to pay it back. The deal for the loan will end as soon as you pay back the total amount you borrowed, in the time set for it. However, the length of the loan term can be extended if both the lender and the borrower agree.
Now that you know the differences between loans and credits, it will be easier for you to decide which option is best . Tell us if you’ve ever needed to apply for a loan or credit and what your experience was like.