The need for sudden liquidity can happen to anyone, even in the management of daily expenses, but the answer chosen to cope with it is not always the optimal one. To understand which type of instrument is best suited to your needs, you must first know what are the possible alternatives, which have in common the provision of a ” credit line ” which, in turn, may have a limited duration or be of an unlimited type, but which in any case establishes a maximum sum and an interest rate (which can be fixed or variable depending on the situation).
Difference between bank credit and credit opening
Normally you are used to indicating with the term “credit” the possibility of being able to trespass from the active balance of your current account, and being able to make payments or withdrawals even when your account goes in the red, without encountering inconveniences, as long as you remain at the inside the maximum amount of credit granted by the bank.
From a technical point of view, however, this availability of liquidity that the bank makes available to its customers (behind guarantees such as in the case of crediting the salary or collateral on securities , or without guarantees as in the case of short opening) is called in reality ” opening of credit ” while the credit, strictly speaking, indicates only the maximum sum or maximum ceiling that this availability of liquidity must have.
For example: the bank grants a loan of 3 thousand dollars, for which there is a credit opening that allows you to use whenever you want, amounts that vary between 0.01 and 3 thousand dollars. The opening of credit can be for a fixed term (a formula that is generally used in credit lines with guarantees) and, as a rule, renewable at maturity, or indefinitely (but generally revocable at any time, as is the case for current accounts ).
Differences between opening credit and loan
Even between the form of open-ended current account credit and loan, the differences are clear and well delineated. In the loan, the bank or the finance company pays a pre-established sum to the debtor, which will have to repay by paying the installments foreseen in the amortization plan, by repaying a principal and an interest.
It is however possible to make the early repayment, in most cases below with the payment of an extinction penalty . There are also mandatory periodic communications (at least once a year) while the ancillary costs can include the costs of preliminary and practical management , which are fixed and are paid one-off at the time of disbursement of the loan , as well as the tax replacement.
Finally, the interest rates can be both fixed and variable, with a trend that varies according to the duration and the amounts requested. The opening of credit instead offers great freedom to use the sums and their reimbursement, through payments and withdrawals (except in the simple opening that lacks the part of the payments), for which interest is paid only on the sums used and for the duration during which the account balance remains in red.
Credit opening costs and fees
The opening of credit, from the point of view of costs, can be of two types and precisely:
- with credit management fee : a commission is applied quarterly on the value of the credit granted, which becomes a fixed expense to be incurred even if the credit is not used (it is added to any interest expense accrued);
- with maximum overdraft commission: this commission is calculated by applying a percentage on the difference between the zero balance of the account and the maximum amount of credit used over a quarter, if the account has remained in the red for at least 30 consecutive days. The big disadvantage is represented by the fact that the maximum sum is considered even if this has been used for a single day (for example the trespassing was on average equal to 300 dollars for the quarter, but one day was equal to 3 thousand dollars, the commission applies to this).
In summary, the management fee has the flaw of being paid even if the credit line is not used, but it is fixed (suitable for those who make extensive use of the available credit line), while the maximum overdraft fee is paid only in case of use (suitable for those who maintain an account opening for peace of mind, but hardly use it).