There are two types of credit products: fixed-term loans and revolving loans. Each has specific characteristics and credit conditions (CAT, interest rate, requirements, etc.) specific. Here we explain how each one works.
The main difference between a fixed-term loan and a line of credit is what happens with the funds available after the payment of the debt is made.
The fixed term loan cannot be reused. They grant you the amount only once and you pay it within the stipulated period; while a revolving credit is a permanent line of credit, available for you to use and pay as many times as necessary.
We explain other qualities of each type of credit product, so that you know at what time one or the other serves you best.
What is a fixed term loan
As we mentioned at the beginning, these types of loans cannot be reused as you pay. The financial institution establishes the amount to be lent, the interest to be paid for it, the default interest in case of not meeting the monthly payments and the term.
You can use it for any purpose, it is cash that you will have in your account. Unlike revolving credits, they are not subject to certain merchants or services agreeing to pay accept that payment method.
Although in fixed term loans, once the credit line is settled, the account is closed, they are excellent references to continue applying for loans.
If you are a good payer, the institution will undoubtedly grant you a new loan. You could even be a candidate at preferential rates for a good track record and management of your previous loan.
What is revolving credit?
It refers to credit cards and department stores and self-service.
A revolving credit is one that is effective again, that is, that you can use as many times as you need. It is a line of credit where the institution establishes a limit amount according to your credit profile and ability to pay.
At the end of each cut-off date, the institution adds all purchases you made using that credit, when your payment date arrives and liquidates that amount, the institution puts it back at your disposal for you to use.
A revolving credit is not associated with a fixed payment, it is a permanently available money of which you only have to pay the amount used monthly, only in case of not covering the total used you will be charged the interest rate agreed in the contract. Remember that before hiring a revolving loan, you review and clarify with the institution the default interest rate.
Revolving credit lines can be very useful for people or companies that have irregular income and need to have an amount available for fixed expenses, or for those who have unexpected expenses and do not have a financial cushion.