Credit and loan – find out the differences between these financial products.
The terms ‘loan’ and ‘credit’ are often used interchangeably. However, this is a mistake. There are many differences between these financial products. Meet the most important of them.
The basic difference between a loan and a loan, ie who grants them
The loan is a financial product offered exclusively by banks and cooperative savings and credit unions. No other institution may grant loans. The issue of loans is different. The loan can be offered by anyone who has the financial means. It can therefore be both a loan company and a neighbor or a member of the immediate family. So there are many entities from which we can borrow money. The choice of lender must be made consciously. You should be aware that although the money received from a friend or from a loan company formally has the same legal status as a loan, the conditions offered to us can vary a lot. It may happen that a loan from a private individual, even from your friend, will be much less favorable than a loan offered by a company.
Necessity of providing purpose – an important difference between a loan and a loan
In the vast majority of cases, when taking a loan from a bank, you must specify the purpose for which you will allocate the money received. From a legal perspective, the money received under the loan is still owned by the bank. Therefore, the bank has the right to know what they will be used for, and even control whether we spend them in a fixed way. If it turns out that the money was spent for a purpose other than agreed in the contract, the bank may even demand a refund of the entire amount.
The situation is completely different with loans. Borrowed money formally becomes your property and you can spend it on whatever you want. During the loan procedure, you do not need to provide any information about the purpose for which you will spend your cash. Of course, when borrowing money from a family, for example, these questions may still be asked. However, institutions that adhere to formal issues, such as loan companies, will not ask you about the purpose of the loan.
Credit and loan – differences in the duration of the procedure
The process of granting a loan at a bank can be time consuming. A condition for granting a loan by a bank is to write out a detailed agreement regarding the amount, currency of the loan, its purpose, principles and date of repayment of the liability, interest rate and the conditions for its change, and finally how to secure the receivable. In most cases, banks also require the presentation of employment, earnings and income certificates. In addition, they analyze your creditworthiness using a procedure called scoring . All this can take a lot of time. And hence, we will wait a bit for the bank’s decision and then for the transfer.
For loans, especially those available online, the procedure is maximally simplified. If you borrow from a good company, you can complete all the formalities in a few minutes without leaving your computer. The contract you sign with the loan company is usually short and transparent. In most cases, you are not required to provide any documents or certificates. For this reason, the time from accepting the application to receiving the money is very short and can be up to 15 minutes.
Credit and loan – the difference in the way of paying back
A loan is a financial product that customers pay back in installments. On the other hand, in the case of loans, the lender is usually given the whole amount once, plus a fixed percentage. However, there are customers who, for various reasons, are better off loan, but would prefer to pay back their obligations in installments. A installment loan was created for such people. It has all the advantages of a classic loan: a quick procedure, no need to provide certificates, and no need to provide a purpose. At the same time, just like a loan, you can pay it back in installments. For example, lender offers such a loan, where repayment can be spread over two years.
Loan vs. credit – differences regarding surety
The bank, when providing the loan, protects itself in many ways against the borrower’s failure to comply with the contract. Forms of such security include, for example, the so-called guarantee. In this situation, the designated person, ie the guarantor, undertakes to pay the debt if the borrower proves unable to pay it back. A mortgage is another security. In the case of a mortgage, the loan repayment will be secured by a property belonging to the borrower, ie a house or a flat.
Good loan companies, unlike banks, do not require any form of guarantee. Of course, there are private lenders who require so-called pledges, in the form of real estate or, for example, a car to be transferred to them as an unpaid loan. However, this behavior occurs mainly in the case of unreliable companies that lend money to very indebted people.