Business

Difference Between Loans and Advances

Main difference

Whenever companies or individuals are in financial trouble, they seek help from financial institutions like banks. Financial aid to make the business/individual stable for the particular operation or function can be of two types; loan and advance. People often find it difficult to differentiate between these two financial aids provided by banks or other available financial institutions. The loan is the financial debt provided by the bank for a certain period; interest is also applied on the amount borrowed and guarantees are pledged. On the other hand, the advance is the credit facility provided by the bank for a relatively shorter time than that of the loans.

Comparison chart

loans advances
Definition Loan is the financial aid or debt provided by the financial institution, such as a bank. Advance is the credit facility provided by the financial institution/banks for a short period.
Interest Since the loan is debt, the lender charges interest. No interest is applied on the advance, since it is the line of credit for a much shorter time.
official contract The official contract is also made between the lender and the borrower after deciding the terms and conditions. Not required
Collateral The collateral pledge is mandatory when an individual or company is taking the loan. Not required

What are loans?

Loan is the financial aid or debt provided by the financial institution, such as a bank. The terms and conditions are already decided by the borrower and the lender, and the formal contract is also made between the lender and the borrower. The borrower must repay the loan in a certain period, which is usually from 1 to 5 years, although it can vary according to the nature of the loan and due to the mutual choice of the borrower and the lender. Small loans from individuals or the less fortunate are taken from microfinance institutes; the interest rate is quite low compared to the interest rate applied by banks to individuals and companies. Both companies and individuals can obtain the loan according to their demand; The more the term of the loan increases, the interest rate will also increase. Banks issue loans after verifying the credit history, employment, income, and business reputation of the company or individual. Those who are delinquent from the state or have a bad reputation are not offered the loan. Considering the need of people, banks nowadays also offer small size loans for a certain period. Some of the basic types of loans offered to people are auto loans, student loans, home loans, and others. The interest rate and the term for repayment of the loan vary in each case. Some of the basic types of loans offered to people are car loans, student loans, housing loans and others. The interest rate and the term for repayment of the loan vary in each case. Some of the basic types of loans that are offered to people are car loans, student loans, home loans and others. The interest rate and the term for repayment of the loan vary in each case.

What are advances?

Advance is the credit facility provided by the financial institution/banks for a short period. No interest is usually applied to institutions as they are offered to reputable/gold clients for a shorter time. To obtain an advance, the borrower does not have to go through the lengthy process of application, collateral, and then an official contract with the lender. The term advance is mainly used to express the salary that the employee receives in advance. For example, an employee works in the company for €10,000 per month; he takes €5k salary in advance before the end of the month due to some emergency, this is known as an advance. Generally, interest is not applied on the amount lent to the borrower and it is repaid in a short time. The advance is the convenient method for an employee to obtain additional cash when needed without accruing any interest or signing an official contract with the borrower. The flow of advances mainly depends on the relationship between both parties, the borrower and the lender.

Loans versus Advances

  • Loan is the financial aid or debt provided by the financial institution such as a bank while advance is the line of credit provided by the financial institution or banks for a short period of time.
  • Since the loan is debt, the lender charges interest. On the other hand, interest is not applied on the advance since it is the line of credit for a much shorter time.
  • The official contract is also made between the lender and the borrower after deciding the terms and conditions, while in advances such formalities are not required.
  • The guarantee pledge is mandatory when an individual or company is taking the loan, while it is not required in the case of an advance.

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