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From other sites I’ve gathered that loans are for long term purposes (12-48 months) with lower rates of interest, while credit is mainly to meet monthly purchases with higher (monthly) rates of interest. Also, once the loan is repaid, I need to apply for a fresh loan if I need to borrow, but for credit, I can simply cycle the previously borrowed money.

Is this the essential difference between the two?

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Besides the definition of the words "loan" and "credit", the wording of your question implies that you're actually asking for the difference between a Term Loan and a Line of Credit (LOC).

  • With a term loan you receive the full initial balance up front, and pay interest on the entire remaining balance beginning on day 1, until the full balance is paid off.
  • With a line of credit you receive no initial balance up front, and you only pay interest when you choose to use the credit.

In other words, a line of credit gives you the flexibility to decide when you want to take out a loan, how much the loan is for (up to a limit), and how long you want the term to be. Note that a credit card is a specific type of a line of credit that comes with some additional perks (compared to a personal LOC or a HELOC).

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    I think this is probably the most useful answer. The layman has credit whether he uses it to buy something and defer payment or not. The layman doesn't have a loan until he signs a paper and gets cash and is accruing interest. – Patrick87 Feb 28 '20 at 14:02
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The difference in common use is between reality and potential

Note that this is specific to the use type, and i haggle along "loan" here. Accounting has other meaning (a credit is the opposite of a debit - i CREDIT your account with money paid in). This is not applicable here.

If I give you a 100k loan you get 100k. You pay interest on that based on some schedule. This is the typical Mortgage - you buy a house, you do monthly payments.

If I give you a 100k credit (line), you can pull up to 100k from that line, but you pay nothing or a much lower rate on the money you do not use AND the line is not reduced by paying money in. This is i.e. how shops may run - the bank approves you up to go down to a certain amount, but you only pay interest on the amount you use and you can just pay that back as customers pay. And then use the money again.

The second meaning is a little fluffy because there may be different definitions depending on whom you talk about - the definition is a little vague AND overlays with the accounting, so that i.e. RonJohn went totally wrong and gave you the definition used in accounting. Among others, credit is also used as replacement for loan in some scenarios ("you get a credit").

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  • The bank loans you money when you buy peanut butter using a credit card. – RonJohn Feb 1 '20 at 7:38
  • But it is not a loan. Credit Cards are the perfect example of not being loans but a credit LINE - you only pay for the amount of credit you use, while for a loan you HAVE to pay for the whole amount. – TomTom Feb 1 '20 at 7:47
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    I disagree with that interpretation. Naturally, a citation supporting your answer might change my mind. – RonJohn Feb 1 '20 at 7:53
  • That is ok. You have a right to disagree. Does not make it correct, though - see. Many people disagree with the earth being round. – TomTom Feb 1 '20 at 7:56
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    @TomTom: That's wrong. The amount you charge on your credit card is a loan. A credit line is the limit on your card. For instance, I have currently charged about $250 on Card X. That's a short-term loan (which I will pay off before the due date). But the limit on the card - the credit line - is something like $15K. – jamesqf Feb 1 '20 at 17:19
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https://www.accountingtools.com/articles/2017/5/17/debits-and-credits

A credit is an accounting entry that either increases a liability or equity account, or decreases an asset or expense account. It is positioned to the right in an accounting entry.

For consumers -- and businessmen who aren't accountants -- the bolded part "credit ... increases a liability" is what matters.

Loans are the typical manner that you obtain credit.

For example, when you buy something using a credit card, the bank has loaned you some money. Thus, your assets have increased -- you just bought some peanut butter -- and your liabilities have also increased, since now you owe the bank $3.

That's revolving credit, since you keep taking out loans and repaying earlier loans using the same loan agreement. It can go on for decades.

Then there are fixed term loans, like when you buy a car, home, or even a refrigerator "90 days same as cash".

Colloquially, though, you're right that "credit" is high rate short term loans, and "loans" are longer term, lower rate debt.

Except... that payday loans and auto title loans are short term with high rates.

Hopefully this is clearer than mud...

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  • This is not applicable at all because yes, in accounting it has this meaning, but in banking - it has a different one. – TomTom Feb 1 '20 at 7:20
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    @TomTom how is "your assets have increased -- you just bought some peanut butter -- and your liabilities have also increased, since now you owe the bank $3" not applicable to OP's question? – RonJohn Feb 1 '20 at 7:32
  • No, because this meant to like "you return something and instead of the money the shop gives you store credit". Your liabilities have not increased in this case. This is credit as opposed of debit. Or a customer asks for a lower price on an already paid item and you send them a credit note (negative invoice) with the money being at their disposal. No loan and debt involved in this meaning. – TomTom Feb 1 '20 at 7:35
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    Wait a sec. peanut butter decreases in value by nearly 50% as soon as you drive it off the lot. So that balance sheet example is problematic. – JTP - Apologise to Monica Feb 1 '20 at 20:36
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    @TomTom Banks don't get to use different accounting standards just because they're called banks. There's a definition of credit that's universal to all businesses, it also applies to banks. – xyious Feb 6 '20 at 17:19

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