Credit lines and loans are products that allow the user to obtain financing, but present differences that must be taken into account when selecting one or the other.
In both cases, it is important to analyze well the money we are going to need, for how long and assess that there are several loan options, depending on the specific needs that we must cover.
Therefore, a loan and a loan are not synonymous . They are products with different characteristics although both solve the financing problems.
Differences between credit and loan
The credit is a contract between a lender and the customer. In this contract, it will be agreed that the client has a certain amount of money during a specific period of time.
The moment and the amount used are decided by the client.
The interest will be paid only for the amount used, not for the total amount of money available on credit, and the return of the credit is also decided by the client, with great flexibility.
The returned credit is again available to the client until the end of it.
For its part, the contract of a loan between an entity and a client collects all the operation of the life of the loan.
After signing the contract, at the beginning of the operation, the client receives a set amount of money and will have to return the agreed periodic installments in the corresponding term.
When looking for financing, loans are a good option, however, we should not choose any.
It is advisable to make a study about the possibilities that exist in the market and make a decision based on our preferences and needs.
Many times the rush leads us to sign a loan with conditions that are not the best for us.
Uses and amounts
The choice between loan and credit depends, therefore, on the amount of money that we are going to request, on the use that we are going to give, and on the requirements and documentation necessary to contract one or another financial product.
You must resort to a loan when you need a large amount of money that, in advance, we already know that we will spend in full and that we will not be able to return in a short period of time.
First, we will have to choose the type of loan that suits us and then sign with the bank a contract detailing the years of repayment, interest, loan fees and monthly installments.
The repayment term is important. The longer term, the more money we will end up paying. Obviously, the repayment term will depend on the monthly fee that we agreed upon at the beginning, which must have a direct relationship with our income.
Generally, financial institutions do not usually establish monthly payments greater than 35% of the net monthly income of the person or family to whom the loan will be granted.
On the contrary, you should opt for a quick credit when what you want is to have money for an extra expense, such as paying an unexpected bill, dealing with a breakdown or reaching the end of the month.
The credit limits vary depending on the entities or the type of credit granted, but normally they range between 3,000 and 6,000 euros . In the event that a higher amount is needed to make a specific payment, it would be better to resort to a loan.
Main differences to be valued
When it comes to getting money, the first thing we have to ask ourselves is what is our purpose when requesting financing.
The users of the credit lines are usually self-employed and small and medium-sized companies that need to have their liquidity needs met at specific times.
In contrast, the objective of loans is usually the acquisition of high-value assets, financing of long-term capital needs or the start-up of a large investment.
Depending on our objective, whether it is buying a house or paying for the studies, the basic differences to be valued between the loans and the credit lines are the following.
- In the loan, the total amount agreed at the initial moment is delivered . On the other hand, only the amount needed at the time is available in the line of credit.
- In the loans, interest must be paid from the moment the capital is delivered, while in the credit lines interest will be paid when the necessary capital is available.
- The credit line can be renewed several times at maturity, while the loan has to be repaid within the agreed term.
- The term of the credit line is less than the term of the loan.
- Interest rates tend to be higher in credit lines than in loans.
In short, there is no better or worse financing. Everything depends on several factors to take into account, to have time to analyze all the offers and choose the one that best suits our particular circumstances.