Loan is the money you borrowed from a lender with the agreement of paying it back with interest. Credit is a wide term that has different meanings in finance. The most usual meaning of credit refers to the entry of agreement between the borrower and the lender when the money is borrowed to pay for any kind of purchase with the promise of paying back in future with the interest. This is known as buying on credit.
The worthiness of a customer to borrow an available amount of money is also called their credit. It tells about their credit history or score and a person with good credit score is considered a reliable borrower. The most common type of buying on credit is through credit cards. When people do not have enough cash at hand, they can use a credit card to buy anything.
There are different credit and loan options. The most popular one of the credits is Bank or financial credit. They include installment loans, mortgage loans, bank credit cards, retail credit cards, gas station credit cards, rental data and unpaid loans taken on by collection agencies and debt buyers. Installment loans further include auto loans for vehicles, student loans and purchase of furniture.
It is not necessary to get credit in monetary form only, but any products or services can also be bought with paying for them later. This is also a form of credit.
Different loan options are secured and unsecured personal loans, pawn shop loans, payday loans, home equity loans, title loans, payday alternative loans and credit card cash advances.
All these credit and loan options can be used to borrow money for paying medical emergency bills, starting a small business, renovation or repair of the house or car, paying for higher educational expenses, buying a car or house, going on a vacation or for shopping or purchasing anything expensive.
In order to get a loan, your credit score or history is checked by the lenders. If your credit history is bad, you need to improve it because with bad credit score, lenders charge high interest. In case of unsecured loan, you can get a guarantor who would be responsible if you fail to pay back your required amount. Student loan is the only one when it does not matter if the student does not have a good credit score, they should be a student only to qualify for the loan.
The two main groups of credit include open end and close end credit. Open end credit is also known as revolving credit. This can be used over and over again for buying anything and is repaid every month. It is not necessary to pay back the full amount monthly. Different forms of this credit are credit cards, home equity loans and home equity lines of credit. When the monthly balance on the credit card is not completely paid, then interest charges apply.
Installment loans are also called the closed end loans and they are used for a certain cause and also for a certain duration of time. There is a schedule that has to be followed for repayment of the primary amount and interest.