Difference between Credit Policy and Loan

These two policies are governed by various legal regulations, including notarial legislation and the Consumer Credit Law 16/2011, of 24 June. In loan or credit policies, a financial institution always intervenes, which grants the policy, together with the applicant. But the difference between a credit policy and a loan lies in various aspects that we will learn step by step below.

While the credit policy is usually requested from the bank by companies or self-employed professionals in the exercise of the company, the loan policy is a banking product that, in addition to companies and self-employed individuals, is also offered to individuals.

Regarding the operation or use of the credit policy, we highlight that the bank places the money in an account and the company or self-employed person has access to the money whenever they need it, being able to deposit and withdraw money whenever convenient, up to the limit of the policy. The holder of a policy, therefore, can decide whether to use all the money or just a part of it.

On the other hand, in a loan policy, the bank grants an amount of money that must be fully credited to the bank account of the person receiving the loan and must be repaid in full within a specified period. We can therefore state that the mode of operation is one of the main differences between a credit policy and a loan.

Sometimes the interest and fees on the credit policy tend to be lower than those of a loan policy, as normally the total credit granted is not fully used. A higher interest will be paid on the money used and a lower fee on the money available but not used. When the term set in the credit policy ends, the total amount of money must be repaid.

In the loan policy, there are monthly interests on the total amount granted and an amortisation table that establishes what must be repaid in instalments (both the loaned money and the interest payment). Therefore, the same interest rate will be paid on all the money received on time.

The purpose of the policy or its destination also represents a difference between a credit policy and a loan. Thus, the credit policy is designed to cover occasional cash flow fluctuations in companies and is widely used in industrial or agricultural businesses where large quantities of goods are purchased during a financial year to be sold or distributed at a later time. It serves to provide liquidity, and we access the credit money only when it is needed.

On the other hand, the loan policy is ideal for financing specific operations such as purchases of goods or services, construction or renovations, debts, or economic needs. It is also suitable for exceptional investments, whether for maintenance, improvement, or development of new business structures.

The credit policy is valid for the period established in the contract and can later be renewed or cancelled. The validity period of the policy is usually short and it is most common for them to have a duration of one year. However, in practice, credit policies of up to three years are seen.

On the other hand, the loan policy has the duration and repayment period set in the policy and it is usually a longer repayment period than in the credit policy. It is common to see loans with durations between 3 and 15 years.

The credit policy is renewable and the loan policy must be granted again if it is necessary for another operation.