Distinguishing Between Credit and Loans

Have you ever borrowed any money? You may already know the difference between credit & loan. This is done by individuals, institutions and organizations to cover expenses or purchases. They can do this by taking out a credit or a loan. Continue reading to learn more about the different types of credit and loans.

Difference between Credit and Loan

What is credit?

Credit is a general term that can be used in many different ways depending on its context. Credit is a general term that refers to an agreement between parties in which one party receives something of value and the other agrees later to pay. The lender is the party who receives the valuable item. Interest is charged on the repayment. Creditworthiness can refer to an individual, a company or an organization. Creditworthiness is a factor that determines how well-suited they are for receiving credit. Credit is an accounting term that refers to the entry in the balance sheet which decreases assets and increases liabilities.

What is a loan?

A loan is an amount of money that one party gives to another. The borrower must repay the total interest. A financial institution or bank can lend or give out money. The party receiving the money could be a person, a business, or an organisation. The principal of the loan is the amount borrowed. Interest is the amount of money that you must repay in addition to the principal, depending on what the lender charges. It must also have a repayment term. This is the time period that you are required to repay the money. The term will depend on the type and amount of loan you have taken.

Different Types of Loan

loans can be classified as secured or unsecured . Secured loans have collateral as security. Unsecured loan approval is based on the credit rating of the borrower. The following are some of the most common types and their workings.

1. Personal Loan

Personal loans can be used for anything, including unexpected medical bills, vacations, engagement rings, and new gadgets. When the interest rates change, the borrower must pay money and interest in fixed monthly payments. If the bank determines the rates, then they may vary. The annual percentage rate is the amount the borrower must pay. The annual percentage rate of the loan is determined by the creditworthiness, income and credit score. The repayment period can range from 2 to 5 year. Personal loans are available as secured or unsecured.

2. Car Loan

A car loan is a sum of money borrowed for the purchase of a vehicle. Also known as an automobile loan. Taxes and fees are included in the total amount of the loan.

3. Student Loan

Student loans are money that is borrowed by a student to assist in their higher education. Federal loans, refinance loans and private loans are all types of student loan. The type of loan a student chooses depends on their financial needs, year in school or credit history.

Business Loans

The loans are given to large, small or medium-sized companies to assist them in running their businesses. Companies repay the loans mainly after five years. A bad credit rating, low cash flow or a high number of loan applications can all prevent an individual from getting a business loan.

Types of Credit

You can choose from the following types of credit:

1. Bank Credit

A bank credit is money that an individual or a business borrows from a financial institute to pay for car loans and mortgages.

2. Revolving Credit

The credit card allows individuals or businesses to borrow up to a specified amount. You can increase your chances of borrowing from the same institution by repaying the balance plus interest. You can pay and revolve the remainder to the next payment. Examples of this are credit cards and home equity line of credits.