Differences between a loan and a line of credit

Although your aim is the same one, your operation of a crédiito and a loan has some differences that suits know.

Banks specialize in providing financing to their customers, and the various options offered on the market include loans and lines of credit. These are two of the most commonly used products for both individuals and companies. However, sometimes there is no differentiation between loans and credit facilities when, in reality, they provide different ways to help you access the financing you need.

For the customer, the most significant difference is that while a loan provides access to all of the requested money at once when the loan is granted, with a credit facility money can be requested whenever a need for liquidity arises. To use a simple analogy, when you receive a loan it is like breaking open your piggy bank and finding that you have all of the money you need; however, a credit facility lets you withdraw money gradually only when you need it. Furthermore, you don't have to use all the available funds.

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How the money is accessed also determines how much interest must be paid. The difference between a loan and a credit facility here is that on a loan you have to pay interest on all the capital loaned; On the other hand, with a credit facility interest is paid only on the money you have used, not on the total amount of money the bank has made available to you. However, it is possible to be subject to an unused balance fee, or in other words, a fee charged on the money you have not used.

There are also differences between loans and credit facilities as regards repayment periods. Loans have longer repayment periods that are generally for a number of years. This means the interest charged on them is higher.

Loans and credit facilities also differ in the way the customer pays back the money received. With a loan, once all the money owed has been paid back via monthly payments, the operation is considered closed, without the possibility of borrowing more money unless a new loan is taken out. The way a credit facility works is much different: in general it is renewed each year so that the customer can continue to use the line of financing whenever necessary. For example, one way to obtain credit is to take out a credit card
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It is important point out that although loans and credit facilities both make a certain amount of capital available to the customer, the difference in the way they work means they are suitable for different situations: loans are most useful when a significant purchase is going to be made or when the amount of money needed is known in advance, while a credit facility operates more as a source of occasional support for expenses that come up unexpectedly.
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