3 Differences Between Financing And Personal Loan
Do you know the difference between finance and personal loan? If someone asked you now, would you know how to answer? If your answer was “no” to both questions, it already justifies why this text interested you. Understand what these two types of credit are and what their main differences are when choosing between them. Apply For Car Finance
What is a personal loan?
It 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 bank, 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.
What is financing?
Here you need to give more explanation. To apply for a mortgage, you need to say what you are going to use the money for, such as buying a home, a new car, or renovating your home. 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.
3 differences between loan and financing
Knowing these three differences, you can choose the best option for your needs.
1 – Purpose
This is actually the 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 the case of financing, the amount borrowed is exactly what you will pay for the property or vehicle.
2 – Practicality
Due to the purpose, financing is more bureaucratic. You 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.
3 – Interest
This is the point that greatly favors funding, and what justifies all bureaucracy. By having a right objective, interest rates are reduced on loans, compared to personal loans of equal value. Loans and financing are two different products offered by financial institutions – and the consumer needs to understand how each one works to make the best choice.
Basically, there are two big differences between borrowing and financing:
What can the customer do with the money
What you need to leave as a guarantee in exchange for it.
How does a loan work
A loan is a contract between a customer and a financial institution: the customer receives a sum of money and needs to return it to the institution within a certain period , paying interest .
Upon receiving the loan, the customer can spend it as he wishes (and then need to pay it back to the institution).
In some cases, banks or institutions may ask the customer to tell how they intend to spend the money – but this does not determine the fate of the loan.
Most of the time, it is also possible to take out the loan without giving any kind of collateral in return.
Some of the common loan types are: personal loan, payroll loan and CDC (direct consumer credit).
Loan interest , therefore, usually takes into account the relationship that the customer has with the financial institution.
Having an account that is not in the negative, paying credit card installments on time and having a monthly income compatible with the amount you want to borrow are usually positive points that institutions take into account when calculating interest rates.
How Financing Works
Financing is also a type of contract between customers and financial institutions – but it has different rules than loans.
Financing has a clear condition: the client must use the amount borrowed on something specific and already agreed with the institution.
When applying for financing, it is necessary to specify the reason and destination of the money. For example: financing for the purchase of a property.
Therefore, generally, the financing has some type of guarantee linked precisely to the good that the client acquired with it. In the case of the property, the apartment that the client bought with the financing is used as a guarantee for the debt.
The most common types of collateral include mortgage or sale fiduciary – a term that usually confuse enough people.
What is chattel mortgage?
In short, the chattel mortgage allows the financial institution offering the loan to be the owner of the asset being financed until the debt is paid off.
The ownership stays with the customer that took funding – which means that it can use the car, property or right at home, but the owner is the same bank or institution that financed that purchase. When the financing is paid off, the property passes to the client.
Financing interest rates, therefore, do not only depend on the customer’s relationship with the institution – but also take into account the type of good he wants to acquire for the requested amount.
In many cases, as there is an asset as collateral, the financing may have better rates – since the risk for the institution that is lending the money is lower.
Loan and financing: which is better?
The best option, between loan and financing, is always the one that fits the specific needs of each one.
Interest rates and payment terms can vary widely between institutions and the types of loan chosen.
Generally, financing is a better option when purchasing a large material asset – such as an apartment, house, car… Most institutions even offer specific lines to finance this type of purchase.
But remember: it is necessary to plan a lot before a loan because the purchased asset is at stake. In case of delay, the institution may be able to take back your financed property or car – even if you have already paid many installments.
The loan gives you more flexibility to spend the money – and, for that reason, you have to be careful. Read More
Before choosing any option, it is worth considering whether:
Do you really need the money?
Do the loan or financing installments fit in your pocket?
Is it possible to wait, save the money and make the purchase – and not take out a loan?