If you want to borrow, you want to keep control of your financial situation. By knowing well in advance which loan you take out and what the conditions of such a loan are, you are already well on your way to keeping control. The most popular loans today are a personal loan (or installment loan) and a credit facility (or revolving credit). Not for nothing because usually no purpose or reason must be given for this. In other words, the destination of the loan amount must not be accounted for at the bank or other financial institution. In both cases you can in principle spend the borrowed money as if it were your own money. But how do these forms of credit differ?
An installment loan or personal loan always has a term attached. The agreement with the bank or other financial service provider states that you repay the borrowed amount within a set period. In principle, that can be any possible term, but in the case of a personal loan without a specific purpose, the lenders usually do not go beyond a term of 5 years.
A credit opening or revolving credit has no duration. The credit is available for an indefinite period of time. As long as there are no irregularities, it provides for a lifelong additional budget room up to the predetermined credit ceiling. This is referred to as a ‘revolving’ credit, because once repaid money can be borrowed again within this formula.
In the case of an installment loan, the interest is generally expressed together with all other costs of the loan in an Annual Cost Percentage. The APR interest is charged on the total loan amount, regardless of whether or not you have spent the total amount. The level of the annual interest is already determined for the entire duration when the loan is taken out.
With a credit facility, monthly interest is charged only on the loan amount. The interest continues monthly until you repay the loan amount. The level of the debit interest rate fluctuates depending on the financial “market conditions”. It can be adjusted up or down by the banks.
Attention. The interest rate at a credit facility is almost always higher than the interest rate on an installment loan.
With an installment loan, the loan amount is repaid proportionally during the term. This can be done in monthly installments, quarterly installments or annual installments. This is determined in advance in the agreement between you and the bank.
A credit opening has no repayment plan. You can make repayments at any time.
Attention. In Belgian financial legislation there is now a legal obligation of “zeroing”. Banks must ensure that a credit opening does not become a permanent debt.
So choose the loan form that matches what you need the money for. If you need a one-off amount for the purchase of a car, the personal loan is most suitable for that. If you want to borrow money for something that you do not know exactly how much this will ultimately cost, then the revolving credit is a better solution. You can always withdraw extra money if you are faced with unforeseen expenses.
Whichever loan you want to take out, borrowing money always costs money.