Differences between loan and credit: we solve your doubts

Both concepts are sources of financing for both individuals and companies, in fact, they are probably the most well-known. Although they have some similar characteristics, they are not synonyms and have different purposes. With this article, we aim to clarify common doubts about these terms.

Financing method

In a loan, the entire financing is accessed immediately at the time it is granted, while in credit, the granted money is available as the need arises, so it is used progressively. In a loan, a lender (who has the money, usually a financial institution) provides the borrower (the individual or legal entity in need of money) with an agreed amount of money at the start of the operation with the condition that the borrower gradually repays that amount in installments along with interest, usually calculated according to the French amortization method.

Interest

The interest paid is also not the same, as in a loan, interest is paid on all the money that has been lent to us, while in credit, interest is paid only on the amount used. It may be that in credit, we are charged a fee for the unused balance, that is, the money from the credit line that, despite being granted and available for use, we have not used.

Duration

Loans are typically repaid over several years, while credits have a much shorter duration – usually a year. The repayment period influences the interest, so loans, being medium/long-term, accrue a larger amount of interest, but the rates tend to be higher in lines of credit. In loans, interest must be paid from the outset, while in credit, it is paid when the capital is used.

Another difference to highlight is that the credit line can be renewed multiple times when it reaches maturity, while the loan must be repaid within the established period, unless it can be renegotiated.

Uses

Typically, loans are used to acquire high-value assets, such as buying a home, pursuing a master's degree, or purchasing a car. Within loans, there are different types: a personal loan usually has a maximum duration of 8 years, while a mortgage loan can be up to 40 years. Depending on their characteristics, they will have different conditions.

A line of credit is an interesting option to be used occasionally to cover unexpected expenses when liquidity is not available. However, using it as a habitual financing method is not the most advisable. It is more useful for companies and/or freelancers than for individuals since it is common to run out of enough money to cover expenses at some point (many outstanding invoices to be collected, poor planning, unexpected drop in sales…).

Credit line at Inversa

Currently, not only banks can offer this type of financing: at Inversa, we work with lines of credit where different companies finance their invoices or promissory notes. They can choose the size of the line from €10,000, and once the invoices to be financed are selected and studied, they are published on the platform. Once published, different investors seeking returns for their savings can invest. When the amount is covered, i.e., there is no money left for anyone else to invest, the invoice is formalized, and investors receive the interests in advance.

This form of collective invoice financing is called crowdfactoring.

We would like to end by recalling one of the basic principles of financial education: debt should be avoided as much as possible. Before spending, one should save, but never the other way around. For example, taking out a loan for a vacation is not advisable, but if you save money little by little for your next vacation over time, you will save on the interest and/or fees of the loan.