There are times when our pockets are tight, or we want to invest in something, and we decide to take out a loan or financing from a financial institution.
When we use these features, we need to understand the differences between loan and financing and which one will best suit us. However, many people do not even know that they are both different and have different credit opportunities.
If you are in this category, this article is for you.
Read on to understand what these two types of credit are and their main differences when choosing between them.
What is a personal loan?
Personal loan is a type of credit with no restrictions for use. You request the amount you want and can use it as you wish. Without much explanation for the financial institution, your only obligation is to pay, of course. The fact of not having a pre-decided objective ends up impacting the number of installments and interest. However, it is still an idea to change that old sofa at home, furnish a new room, or pay off a debt that has skyrocketing interest rates.
For example, at Fairstone, you can request for a personal loans up to $15,000 for bill consolidation, home improvements, and unexpected expenses.
What is financing?
In this form of credit, you need to give more explanation. For example, to apply for a mortgage, you need to say what you will use the money for, such as buying a home, a new car, or renovating your home. Of course, the money needs to have the right destination, but don’t think that’s bad. The fact that the bank knows exactly what it’s going to help you with often reduces interest.
Three differences between loan and financing
Knowing these three differences, you can choose the best option for your needs.
1. Practicality
Due to the purpose, financing is more bureaucratic. The bank need to see how you’re going to spend the money. So there is a lot of paperwork to be turned in, and it may take a little longer. With this, the personal loan becomes more practical.
Furthermore, the payment terms between the two modalities are also different. When applying for a loan, remember that the payment is short and medium-term. Financing can be paid in up to 30 years.
2. Purpose
This is a big difference, as financing is a type of loan, but it has a specific purpose and will be used for a purpose already defined and aligned with the bank. Unlike a personal loan, you don’t need to notify the bank, but that doesn’t mean you don’t know what you’re going to use it for. In financing, the amount borrowed is precisely what you will pay for the property or vehicle.
3. Interest
This is the point that greatly favors financing and what justifies all bureaucracy. With the right objective, interest rates are reduced on loans, compared to personal loans of equal value.
Financing is often used to release higher credits, for example, to purchase a property or vehicle. As a result, the interest rate between the two types of credit is quite different even in the same bank.
Choosing the best option
If you want to purchase a high-cost asset such as a home or a car, it is advantageous to opt for a financing. Because once the credit is approved, the purchase is carried out by the bank at low-interest rates.
If you want to pay off a debt or invest the money in something less expensive, a loan can be a good option because of the freedom offered to use the money and ease of credit approval.
However, there is no rule for this decision. Therefore, it is essential to note the objectives and tools available to make this choice.