Difference Between Loan and Credit Facility

Loan and Credit Facility

There can be no doubt that both the loan and credit facilities are similar but the difference lies in the manner of disbursing the loan amount. The loan that is obtained by way of the credit facility is directly disbursed to the individual. On the other hand, the loan obtained through the loan option is directly disbursed to the lender. So, the main difference between the two is that the loan has priority over the credit.

However, a person cannot avail the loan through this facility just like he can the one for the credit. In order to avail loan via this facility, the individual has to pledge the security or sometimes even offer some valuable asset as collateral. This type of loan facility also gives an opportunity for the lender to have a look at the credit report of the borrower. The bad credit records of the borrower will definitely reflect upon the credit report.

However, there are certain factors which will allow you to get a loan via the credit facility. If you are employed and earning a decent amount of money then this loan option will be the best option for you. You also do not require to offer any valuable asset as collateral. In case of bankruptcy, this loan facility may not be possible for you. If you are self employed and earning an insignificant amount of money then this loan option is likely to be the best for you.

The loan amount will be easily accessible to you as this amount is secured against the collateral. If you fail to repay the loan then your asset is at stake. In case of bankruptcy, the loan amount will be inaccessible. The loan amount that is secured against the collateral will be at a lower interest rate. This is the most attractive factor of the secured loan.

On the other hand, an unsecured loan will have a high rate of interest. This is because there is no security or asset to provide as guarantee. So, if you fail to repay the secured loan amount then there is no possibility for recovery of the loan amount. Even in the worst scenario, if you file for bankruptcy then it is impossible to claim back any loan amount from your creditors.

The repayment structure of the secured and unsecured loan will be same for both the loans. The only difference will be in the loan amount and the payback period. In the loan repayment structure, the unsecured loan will have a longer loan period with small monthly repayments. However, the loan amount will be at higher interest rate. The monthly installments also will be comparatively higher.

The best option for getting the benefits of this credit facility is to go for a secured loan. If you can pledge any valuable asset as collateral, you will get a good credit facility. But if you want a loan at a lower rate of interest and faster payback, then go for an unsecured loan. You can even go for a combination of the two by getting both secured and unsecured loan and use the borrowed money to repay the secured loan amount and save the unsecured loan for further expenditures.

Most of the creditors will lend you more than what you actually require. This is because they will always look at your credit score. A poor credit score will not let you take advantage of any financial assistance for any purpose. In order to avail the benefits of the credit facility, you need to take care of your credit score and make sure that you repay the loan amount on time.

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