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What is the difference between a loan and a credit?

Loans and credits are different finance mechanisms. Both are banking products that provide capital to the borrower but differ in terms of definition and objectives. While a loan provides all the money requested in one go at the time it is issued, in the case of a credit, the bank provides the customer with an amount of money, which can be used as required, using the entire amount borrowed, part of it or none at all.

Differences between a loan and a credit

A loan is a financial product that allows a user to access a fixed amount of money at the outset of the transaction, with the condition that this amount, plus the agreed interest, be returned within a specified period. The loan is repaid in regular instalments. The main characteristics of a financial loan include:

  • The transaction has a pre-determined life span.
  • Once all the capital has been repaid through the payment of the instalments (monthly, quarterly, half-yearly…), the operation is concluded without the possibility of accessing more money, unless a new loan is arranged.
  • Interest is charged on the total amount of money borrowed.
  • Loans have a longer term, usually of years.

A credit is a more flexible form of finance that allows you to access the amount of money loaned, according to your needs at any given time. The credit sets a maximum limit of money, which the customer can use in part or in full. The customer may use all the money provided, part of it or none at all. We review the main characteristics of a credit that distinguish it from a loan:

  • Interest on credits is usually higher than on a loan.
  • Interest is only paid on the amount used, although there may be a minimum fee payable on the undrawn balance.
  • As the money is returned, more will become available, provided that the limit is not exceeded.
  • Unlike the loan, the credit is usually renewed each year in order to allow the customer to continue to use this credit facility whenever necessary.

The usual ways to obtain finance through a credit are credit cards and credit facilities or lines of credit, which are generally arranged through a current account in which deposits and withdrawals can be made up to the agreed limit.

Credits are usually used to cover delays between receipts and payments for companies, to deal with specific periods of lack of liquidity or for specific purchases. Loans, on the other hand, are often used to finance the purchase of goods or services.

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