Loan vs. Credit: What is the Difference

The main difference between a loan and credit is the way the funds are disbursed. A loan provides all of the money requested at the same time; however, in the case of credit, you get an amount that can be used as needed. Credit funds are available to be borrowed all at once, in portions, or none at all.

All in all, a loan and credit are two different types of financing. They are both banking products that provide capital to borrowers.

What Do You Mean By Loan?

A loan is a financial product that you can borrow from a bank, financial institution, or any other lender. You get the full amount at one time, and you need to pay it back with the interest in fixed installments, called EMIs. There is a specific time frame for returning the amount.

Here are some important characteristics of a loan -

• They can be short-term or long-term, between 3 months to 30 years

• The EMIs include the interest and the principal amount

• The interest rates can be either floating or fixed

• Once you have paid off all the EMIs, you don’t have any more funds available unless you take a new loan

What Do You Mean By Credit?

A credit is a more adaptable type of financing that allows you to access the amount of money loaned based on your needs at any given time. 

The credit establishes a maximum amount of money that can be used in part or in full. You may use the entire amount of money provided, a portion of it, or none at all.

Let us take a look at the main characteristics of a credit that set it apart from a loan -

• Higher interest rates and lower amounts as compared to loans

• Have a higher and more direct impact on credit scores

• No interest needs to be paid unless you withdraw or use an amount from the approved limit

• Although interest is only paid on the amount used, a minimum fee may be charged on the undrawn balance

• More money will become available as the money is returned, as long as the limit is not exceeded

• When you have an approved line of credit, the bank or financial institution advances them a set credit limit that they can use in full or in part over and over again. This converts it to a revolving credit limit, which can be used whenever needed.

Types of Loans & Credit

Loans and credit can be either secured or unsecured. Let’s learn how they differ.

Secured

You need to use some security or collateral to apply for such a loan or credit. The assets can be gold, stocks, land, property, vehicles, etc. Here are some characteristics of a secured loan or credit - 

• Lower interest rates

• Higher loan amounts

• Longer tenures

• Can be availed even with low credit scores

• Easier to avail

• If you fail to repay it, the lender has the right to sell the asset to pay for the loss

Unsecured

You do not need any collateral or asset to avail of an unsecured loan or credit. Here are some factors that set an unsecured loan apart from a secured one -

• Higher interest rates

• Lower loan amounts

• Shorter tenures

• More complex eligibility criteria 

• A good credit score is required

How to Choose Between a Loan and Credit?

Is a loan or a credit better for you? The answer depends on your requirements. However, here are some things to consider which might help you make the choice -

• Both have an impact on your credit score. Having both types in your credit mix might even be better for your credit score.

• You have to pay interest in both cases, but how they are calculated varies.

• Loans are better for large, one-time spending. However, credit lines provide flexibility for smaller expenses.

A line of credit is a much more flexible way to borrow funds for smaller, ongoing expenses. This also implies that a line of credit may be a better option for emergency funds. If you don't borrow from your line of credit, you won't have to pay interest, but it's there if you need it.

However, in the case of businesses, a line of credit can be utilized as working capital. Whereas loans can be used to buy fixed assets, like equipment, and real estate.

We hope after learning the difference between a term loan and cash credit, you will be able to decide which of these products is the right choice for you! You can now get both of these products through the Moneyview digital lending app. To know more, please visit our website or download the app.