Loan and credit: what is the difference and how are they similar

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

We often encounter the terms "loan" and "credit". What is the difference between them to an ordinary person may not be clear. A loan is often referred to as a "bank loan". However, there is a big difference between these two concepts. To find out how a loan differs from a loan, you need to familiarize yourself with the economic nature of these two concepts.

The fundamental difference between a loan and a loan

In general, a loan is a sum of money issued by a banking institution at interest for a certain time. The main characteristics of the loan are payment, urgency and repayment. It follows that this type of relationship does not involve the issuance of borrowed funds free of charge or for an unlimited period. What can not be said about a loan, which can be not only in cash, but also in the form of property. In addition, it can be given both free of charge and paid. The concepts of "loan" and "credit" are discussed in more detail below. What is the difference between them can be understood if you only study their basicfeatures.

Credit

A loan has the following features and properties that are different from a loan.

• The relationship between the borrower and the credit institution that provides the loan is regulated by both the Civil Code and financial legislation.
• Having studied the concepts of "loan" and "credit", what is the difference between them can be seen from the participants in these relationships. Only a legal entity that has a license from the Central Bank to carry out lending operations can act as a creditor. These can be banking institutions, microfinance organizations and others. And the lender can be both a legal entity and an individual.

• Lending can only take place in cash.
• The lender is not the owner of the borrowed funds, he plays the role of an intermediary, and the accumulated money is the debit deposits of third parties and the amount of interest received from other borrowers on other loans.
• A loan agreement between the bank and the borrower is obligatory for conclusion with any loan amount.
• If you look at the economic nature of the concepts of "loan" and "credit", what is the difference can be understood by the fact that lending should be paid, that is, the lender should set an interest rate for the use of borrowed funds. In addition, he has the right to also include fees for maintaining the loan. A loan can be both gratuitous and paid.
• The interest rate should not be lower than the refinancing rate at the time of issuing money, inotherwise, the lender will go bankrupt, because he has his obligations under debit deposits and his own loans.

• The lender can develop purpose-built loans, which involve the direction of funds received by the borrower, only for the purposes specified in the loan agreement.
• Another feature that distinguishes a loan from a bank loan is that the loan debt is repaid in full at a time, and the loan debt is repaid in parts, according to the schedule presented in the loan agreement.
• The lender has the right to legally demand from a potential borrower collateral in the form of property or third-party guarantee, as well as impose pen alties for late payment on the loan.
• Property under pledge is considered encumbered and the borrower's rights to it are limited until the loan is repaid. If damage to the collateral occurs, the bank has the right to require the borrower to fully compensate for the damage, even if the borrower pays all loan payments on time.
• The difference between a loan and a loan is that in the case of a loan, the lender has the right, if the borrower refuses to repay the borrowed money, to demand through the court the full repayment of the debt, along with all fines.
• The loan is distinguished by the presence of special lending products with state support, which allow certain categories of borrowers to receive money on favorable terms.

Loan

In terms of "loan" and "credit" the difference is that the loan does not have to be on a fee basis. A loan is one of the loan options offered by a bank or other lending institution. And a loan can also be obtained, for example, at an enterprise in which a person works, and the like.

Types of loans

Thus, the concept of "loan" is used more widely than "credit", and it has the following types:

• Consumer loan.
• Bank loan.
• Property loan.

A property loan involves the transfer of property, a bank loan is a bank loan on a fee basis, and a consumer loan is issued when a person purchases any thing, for example, household appliances, a car, etc.

Why do you need a loan?

Why do you need a loan if you can take a loan and not pay interest on it? To answer this question, you need to understand how a loan differs from a loan and what advantages they have.

To take out a loan or borrow money from someone, you need to have a trusting relationship with the lender, and to achieve such a relationship you need to try long and hard. And in order to receive a loan, you only need to confirm your solvency to a credit institution. Today, banks have developed loan programs that allow you to get a small amount of money with just a passport. True, such lending involves higher interest rates, which is associated with the risk that the bank bears.

Similarities of loan and credit

There are also similar moments in the concepts of "loan" and "credit". What is the difference to the reader is already clear. How are they similar?

Both of these concepts imply that borrowed funds or property (in the case of a loan) must be returned. Interest must be paid on the loan, as well as commissions for the use of funds. In the case of a loan under the agreement, there may also be a certain consideration for the transferred property, which can be expressed in cash.