The Differences Between Loan And Credit

The loan is usually tied to a particular investment, such as consumer, production and service goods. Through this financial contract, a financial institution gives the company a sum of money, the whole amount at a time.

Definition of loan and credit

It will have to repay that amount of money and interest (ie, the price of the transaction) within a pre-set period. In other words, the company receives money at a time, at the beginning of the operation, and returns by paying periodic fees, including interest.

Credit is generic and is not tied to specific transactions. By means of a financial instrument, a financial institution grants the company the right to indebtedness up to a certain amount during the pre-determined period of time; therefore, the company will pay interest on the amounts actually used, and not on all the credit granted.

Any unused amount is usually charged a commission. The amount of this commission is significantly lower than the interest rate on the money used

Differences between loan and credit

loan and credit

Typically, lending gives businesses more flexibility than loans, and interest is paid only for the money used. In return, the interest rate on loans is higher.

Therefore, companies with current cash-flow needs are better off applying for credit, albeit slightly more expensive. If they apply for a loan, it may end up being more expensive because they will have to pay interest on the unused money. Typically, credit lines are used to finance circulating needs (stocks, credit for customers, etc.).

It is often wrong to use a current account debt

It is often wrong to use a current account debt

Suppose the company has an account in a financial institution, and that account has no funds to deal with a debit. If this debit occurs and the financial institution accepts it, a balance will be created against the company. The interest rate on debt is the highest rate that banks apply. In addition, the commission is charged to the largest quarterly balance. The penalty is high for users and they need to be regularized first.

Debtors have to be occasional because they are very expensive. If common, this means that the company needs more funding; in other words, the credit needs of the company must be documented and the limits set for its convenient activity.