There is a considerable difference between a loan and a loan. In both you will have costs, translated by interest. One usually involves lower interest rates, while the second one involves higher interest rates. But we can not just consider this when comparing these two ways of getting money in the financial market.
Understanding Financing and Loans
Financing and lines of credit / loans represent two different methods to obtain resources for companies or individuals.
Typical financing can include mortgages, educational credit, auto financing and some types of personal loans. These are obtained once, with fixed lump sum extensions that tend to be paid through consistent and periodic installments.
Lines of credit / loan are generally seen as an extended debt limit for a consumer, and the funds can be borrowed again later after the money is repaid. There are non-revolving credit lines, but most do not have a “end date” to end. Examples are credit card and overdraft.
There are several “general” differences between loans and credit lines. Large debts, like a home or a car, tend to be made through financing. These are more likely to be secured, giving greater security to the borrower and the lender. Lines of credit and loans tend to have higher interest rates and lower minimum payment amounts. Loans generally create more immediate impacts, on your financial profile and your ability to pay. Financing also ends up having higher costs than loans in the long run, and in the short term the reality is the reverse.
Two great differences between these two methods of financing involve “when” and “for what.” If you are approved for a financing, whoever sells the good (property, vehicle, renovations etc) receives the full amount immediately and usually starts with payment of interest on the funds immediately. If you are approved for a loan, you will receive the ability to borrow up to a certain amount, but you will not receive a large sum or money transfer already on the expensive side. The accrual of interest only begins when you actually make a purchase using the loan.
Many financings also require a specific purpose. For example, you can get student credit to pay for higher education, finance to buy a property, etc. Loans, however, do not have a specific buying purpose. Purchases can be made from a variety of items without the approval of the lender, and the assets to be purchased need no valuation.
In this way, loans represent a much more flexible borrowing tool. Payments also tend to be much more flexible, since the values and the purchase dates are uncertain. This uncertainty is offset by higher interest rates and sometimes higher loans. Interest replaces the security that a lender gets by having assets involved and that can be sold to repay the loan debt. But it is still possible to “protect” the credit line through the pledge of assets, payroll and even assets that are already yours, such as vehicles and real estate.
Should I choose a financing or loan?
A financing will, necessarily, involve the purchase of a service or asset. This can be a vehicle, a property, building material, equipment and tools for your business or your home, among others. Some of these loans receive government incentives, such as housing finance and some types of business financing. This is a guarantee that translates into lower interest. In addition, by involving a financial asset, the lender can use such asset as a form of payment of the defaulted borrower, resulting in lower interest. There are, however, some limitations.
You may not get enough resources to fund one or another asset. Older vehicles, for example, are generally not funded by financial institutions, and you will end up needing to seek a personal loan or own funds to pay for the older vehicle. There are conditions for financing, both on the part of the asset / service to be obtained and on the part of the borrower.
A loan / line of credit does not necessarily require a counterpart of the borrower. This loan is calculated according to the risk analysis of the borrower, assessing its borrowing capacity mainly with the proof of its income and its assets. These can even be used as collateral in the loan, to ensure a higher limit for your line of credit or more affordable interest. The loan will also not require a counterpart or be judicious of how the money will be spent, providing greater flexibility for its use. But all this translates into greater risks for the creditors, who increase the interest due to the insecurity for the possible non payment of the loan. Not always, however, a loan will be more expensive than a loan.
You should research prices to find the best deals and lowest interest rates by negotiating with different banks and financial institutions. Weigh in the best opportunities and use this research time to save more money and contribute a larger portion at the entrance, generating lower costs for the borrowed money.
Have you used a loan or financing? How did you find the lowest interest? Did you find lower interest rates on loans or financing?