The terms loan and financing have many different definitions. However, there is often a misunderstanding between the two terms. What is the difference between loans and financing? Check out the explanation below.
Definition of credit
According to the Banking Law, a loan or credit is the provision of money or bills that can be equated with it, based on agreements or borrowing and lending agreement between a bank and other party, which requires the borrower to repay after a specific time with interest.
In summary, a loan is a financial facility that allows a person, company, or business entity to borrow money with an agreed repayment installment time and interest.
Definition of Financing
According to OJK, financing is funding support for the needs or procurement of specific goods/assets/services whose mechanism generally involves three parties: the funding party, the provider of certain goods/assets/services, and the party utilizing certain goods/assets/services.
The Differences between Credit and Financing
In addition to differences in definition, loans and financing have other differences. These differences are the parties involved, the mechanism, and the provider of funds.
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Parties Involved
Who are the parties involved in credit or credits? Credit only involves two parties: the borrower customer (the debtor) and the financial institution as the credit provider (the creditor).
The difference is that in financing, three parties are involved: the user of the goods/assets/services provided (customer), the funder (bank or financial institution), and the provider of goods/assets and services. However, some mechanisms only involve two parties, such as gold financing at Sharia banks/BPRs and financing by sale and leaseback.
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Mechanism
In credit, the customer submits a credit application to the fund provider, and then a feasibility analysis is carried out. If the customer is deemed worthy of credit, the fund provider will disburse the credit. Fund providers carry out feasibility analysis by considering various risks faced by customers.
Meanwhile, customers usually submit requests for the goods/assets/services needed in financing. After that, the fund provider will buy it from the vendor or goods provider to resell to the customer. The customer will pay the fund provider in cash or installments according to the agreement.
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Fund Provider
The providers of credit funds are generally conventional banks, BPRs, and Pegadaian. Meanwhile, in financing, fund providers are Sharia banks, financial institutions providing sharia products, and finance companies.
It turns out the difference between credit and financing is quite significant. Know the services you need before making a choice. I also got to know the various credit services at Bank MAS.
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