Many times we use the terms “loan” and “credit” without really knowing if we differentiate them well. Is there really a difference between credit and loan? Normally experts try to establish clear differences between both words and you have even heard the repeated question, “Do not you know the difference between a loan and a loan?”; however, if we stick to the definitions it should be concluded that they are actually synonymous. In spite of this, in Spain they are commonly used as different words due to the meaning that financial entities have generated from them. In summary, it can be said that they are the same and that they are used differently due to the uses and customs acquired. Let’s start with the most basic: the formal definition of Loan and Credit: According to the RAE, with the word “credit”, we refer to “Amount of money or other means of payment that a person or entity, especially banking, lends to another under certain conditions of return.” The Royal Spanish Academy includes nine other related definitions, however, it is the first one that interests us. As for “loan”, according to the RAE, we are referring to “amount of money that is requested, generally to a financial institution, with the obligation to return it with an interest”. Thus, from the same formal definition of the RAE we can conclude that, indeed, they are the same since both in the case of loan and in the case of credit it is a quantity of money that is delivered to be later returned.
More in depth: Credits vs. Loans
Next, we will describe its most common meaning according to which several distinctions can be made between the use of these two concepts, based on their banking use: Credit is spoken when the amount of money granted has limits set in advance . Also when the client does not receive the entire amount at one time, but takes advantage of small amounts depending on the needs within the established limit. There is also talk of credit when the way to manage or access this credit is through a card or bank account or when the consumer only pays the interest derived from the money actually available, postponing the amortization of the principal when due. Finally, this meaning is also given when this financial product is granted for a limited time and with a time horizon of 1 to 3 years, which, however, can be extended. That is why a credit policy in the financial world is associated with specific needs of money or money (unforeseen, punctual payments, etc.), both in physical and legal persons. An example of a credit would be a line of credit of up to € 5,000 a year whose annual interest rate is 5% and the non-availability fee of 0.6%. In this case, as the bank “blocks” this amount for your needs, it charges you at every moment 5% on the amounts used and 0.6%, much less, on the quantities not used. Throughout the year at any time you can choose between using from 0 to 5,000 euros. On the other hand, we speak of Loan when the client receives all the money requested at one time or when the fixed amount granted by the bank with the loan must be amortized together with the agreed interest in a previously fixed period and without the possibility of be expanded. This concept is also applied when the repayment of a loan is made through monthly, quarterly, etc. or when the interest on the loan is calculated on the total borrowed money. An example of a loan is a mortgage loan in which the bank lends you, for example, € 80,000 to be repaid in 20 years, at a 3% annual interest and which are used entirely from the beginning to pay for a house. In this case, therefore, there would be no unavailability commission since all the money is always being used.
And what happens with the mini-loans?
If we stick to the above definitions, a mini-credit, down payment or quick loan operates in practice as a loan, since the entire amount is available only once and must be amortized in a single installment with your next payroll or income. With regard to microloans , the ease of application again prevails, in fact, it is the great difference with regard to loans to banking entities, since the latter usually make the process very complex for the nature of this product (small advance of payroll) while companies like hemibank that are dedicated to the granting of quick loans are an agile solution to a specific problem, also at a higher cost.