Credit Facilities And Loans: The Differences And Characteristics

Credit facilities and Loans are different financial aids. They are banking products that provide capital to the borrower but differ in terms of definition and objectives, disbursement, repayment, etc,..

While a loan provides all the money in one go at the time of disbursement, in the case of a credit, the bank provides the customer with an amount of money, which is used as required, using the entire amount borrowed, part of it or none at all. Also read What the 5 Factors That Affect Your Credit Score? FICO Score Report.

Differences Between a Loan And Credit Facilities

There are many distinctive differences between both funding. Let me show you a few of such:

Structure

A loan facility usually disburses funds to the borrower as a one-time lump sum, whereas a credit facility grants you access to a revolving line of credit.

This happens over a specific period of time, and the borrower can borrow and repay the money multiple times in a credit facility, up to a an already agreed credit limit.

Repayment

The borrower of a loan, repays the principal and interest through regular payments over a specific term until full repayment of the loan.

Whereas, in a credit facility, there is flexibility to make repayments and interest only on the borrowed amount and for the borrowing period.

Flexibility

Credit facilities have a greater option of flexibility. The lender, allows the borrower to borrow funds as much funds as possible and repay them when they have it.

This flexibility can be very useful for businesses that have various cash flows or for individuals who want money for ongoing expenses.

Furthermore, a loan is a financial product that allows a user to access a fixed amount of money at the beginning of the transaction, with the condition that this amount and interest, be paid back over a period time. This money is repaid in regular instalments.

Characteristics of a Loan

The main characteristics of a financial loan include:

The transaction has a definitive life span.
Once all the capital is repaid, whether monthly, quarterly, half-yearly that ends the transaction except and unless a new loan is taken.
Interest is charged on the total amount of money borrowed.
Loans have a longer terms, it can run into years.

Whereas on the other hand a credit is a more flexible form of finance that allows you to access the amount of money according to your needs at any given time.

The credit sets a maximum limit of money, which the customer can use in part or in full. The customer may use all the money made available, part of it or none at all. Let me show the characteristics of a credit facilities that distinguish it from a loan:

Characteristics of Credit facilities

The interests on credit is higher than that of a of a loan.
Interest is only paid on the amount used, although there may be a minimum fee payable on the undrawn balance.
As the money is returned, more will become available, provided that the limit is not exhausted.
Unlike the loan, the credit is renewable each year in order to allow the customer to continue to use this credit facility whenever necessary.

What Are Credit Facilities to Consumers?

Consumer credit allows consumers to get an advance on income to buy products and services. In an emergency, such as a car breakdown, consumer credit can help you get the funds you need.

Credit cards is an acceptable form of repayment. This is because it is comfortable and convenient.

Ways to Access Credit Facilities

Credit Cards:

Credit cards function as a popular form of credit facility, providing cardholders with a predetermined credit limit.
Cardholders have the ability to make purchases or cash advances up to their credit limit.
Repayment of credit card balances is typically required by the due date indicated on the credit card statement.
If the full balance is not repaid, interest charges are applied to the remaining amount.

Lines of Credit:

A line of credit offers borrowers a flexible credit facility with access to a predetermined credit limit.
Borrowers can withdraw funds as needed and are responsible for repaying them over time.
Interest is typically charged on the outstanding balance of the line of credit.
Lines of credit can be secured with collateral or unsecured based on the borrower’s creditworthiness.

Overdraft Facilities:

Overdraft facilities are commonly associated with checking or current accounts.
Account holders have the option to withdraw funds beyond their account balance, up to a predetermined overdraft limit.
Interest is applied to the amount overdrawn, and additional fees may be applicable.

Personal Loans:

Lenders provide borrowers with personal loans, which are credit facilities structured as installment loans.
Borrowers receive a lump sum of money from the lender.
The borrower then repays the loan through fixed monthly installments over a specified period.
Personal loans can be secured with collateral or unsecured based on the borrower’s creditworthiness.

Conclusion

It is however of great importance to note that the specific terms and conditions of credit and loan facilities differ between lenders. Similarly, knowing The Importance of Regularly Checking Your Credit Report is necessary, so you do not fall into unnecessary debts. This all depends on the borrower’s financial profile and requirements. Also consult with a financial professional or the lender directly to understand the terms and conditions and implications of each type of facility.