A loan is a financial operation by which a person (lender) grants, through a contract or agreement between the parties, an asset (usually an amount of money) to another person (borrower), in exchange for obtaining an interest (price of money).

The loans are considered a financial operation of single benefit (principal) and multiple consideration (payment of installments). The amortization, that is, the gradual repayment of the loan, will be made according to the duration, interest and agreements reached that allow to return the principal of the loan with interest.

Loans can be divided into several classes depending on their nature. Thus, we will say that it is a simple loan if interest is not paid periodically, or a loan with the American system if there is a periodic payment of interest. There are several methods of financial amortization. In addition, sometimes the loans are for a single benefit and consideration, since the total return is agreed with an interest at the end of the duration of the same, that is, without the payment of installments.

Elements that make up a loan

These are the main concepts that we must know when receiving or working with loans:

  • Principal capital: It is the amount of money that has been loaned and on which an interest will be paid depending on the duration of the loan and the risk of the borrower of the loan.
  • Interest: It is the financial cost of the loan, that is, the price of money. It is the charge that is charged for the use of someone else's money or capital for a time, and is represented as a percentage of the principal.
  • Fee: Each of the repayment payments where the principal and interest are distributed.
  • Term: It is the time during which the loan will be used. The term will run from the beginning of the contract until the last installment is paid, thus returning the entire principal and interest.
  • Lender: It is the agent who lends the money, and to which it must be returned along with some interest.
  • Borrower: Person who receives the capital and must return it as agreed, together with interest.

Both the lender and the borrower can be individuals or legal entities.

Main differences between a credit and a loan

In financial matters, a ‘loan’ and a credit, although they are similar, have differences. In credit, the bank provides the client with an account, where the client will access the amount of money he needs and he usually pays the requested credit periodically, with the expenses and interests added by the entity.

For its part, in a ‘loan’, the bank makes a fixed amount of money available to the debtor, which must be returned, together with interest, in a predetermined time. It is usually a medium or long-term operation, which is amortized in regular installments, as the client pays for it. However, in both cases, it is the banking institution that lends money so that within a certain period it is returned along with some interest (principal + interest). Below is a link to see the differences in shape concretely and with examples.

Difference between loan and credit

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