Bonds vs. Loans - Comparison at a Glance
Understanding the differences between the two popular debt instruments
| Feature | Bonds | Loans |
|---|---|---|
| Source | Bonds can be sold or bought from a bond market | Loans can be availed from banks, NBFCs or other private lenders |
| Trade | Bonds can be sold before the maximum period of 30 years | Loans cannot be sold and will have to be repaid within the decided repayment term |
| Interest Rates | Bonds usually come with fixed interest rates | Interest rates on loans can be fixed or variable |
| Owners | Bonds are usually availed by private individuals as an investment from the government or large companies looking to raise funds | Loans are availed by private individuals generally for financial assistance from banks or NBFCs |
| Risk and Interest Rates | The risk associated with bonds is quite low and can also be considered as an investment. Therefore the interest rate offered is quite low | Loans that require collateral are considered to be low risk and therefore come with lower interest rates whereas unsecured loans have a higher interest rate |
| Examples | 3 years Capital Gain Bonds | Personal Loans |
Difference between Bonds and Loans
While bonds and loans may seem similar at first glance, there are quite a few differences between them as given below -
- While both bonds and loans are debt instruments, bonds are a way for a government or a company to raise funds by selling IOUs and pay interest to the investor/lender which in most cases is the public. Loans on the other hand is provided by banks or financial institutions to private individuals generally at a variable or fixed rate of interest
- The interest rates offered by bonds are relatively low and can also be considered an investment whereas loans come with slightly higher interest rates and will need to be repaid by the borrower which in most cases is a private individual
- Loans are mostly provided by banks or financial institutions whereas bonds are offered by large companies or the government
- Bonds usually come with fixed interest rates whereas loans can have both fixed and variable rates of interest
- Bonds are tradeable i.e., they can be sold before the maximum period of 30 years and is usually considered as an investment. Loans on the other hand cannot be traded and will have to be repaid
- Value of bonds can fluctuate and are usually purchased or sold on the bond market. Loans on the other hand come fixed options(amount, interest rate, and repayment term) as decided by the borrower and lending institution
- Loans can be availed from banks, NBFCs or other private lenders whereas bonds can be purchased from a bond market
What are Bonds?
There are multiple investment options for individuals to choose from and one of them is a bond. Bonds are a debt instrument wherein the company issuing the bond ‘borrows’ money from the lender i.e., you as a bond holder. In return, the bond issuing company must pay interest on the principal amount. This interest is also referred to as a coupon.
Most of us have borrowed money in the form of loans whenever we needed monetary help. In a similar way companies or even the government may require funds for programs or infrastructure. In such cases rather than borrowing from a bank, bonds are issued to the public.
Investors who purchase these bonds help these entities that require monetary help. Therefore, it is similar to a regular loan where the investor is considered as a lender.
Benefits and Features of Bonds
Given below are some of the salient features and benefits of bonds:
- Bonds are considered to be relatively safe investments and are fixed income securities. While the risk factor is low, the returns are relatively low as well when compared to other options like stocks
- While stocks and bonds are similar, the main difference is that stockholders have an equity stake while a bondholder has a creditor stake in the said company
- There are different types of bonds available today such as government bonds, corporate bonds, tax saving bonds, bank bonds, inflation linked bonds, perpetual bonds, etc.
- The amount that is being borrowed is referred to as face value while maturity date refers to the day the amount will be repaid on
- The interest on these bonds are paid at a fixed rate generally and on a predetermined schedule
- Bonds are considered to be a long-term stable investment tools where assured returns are accrued and are also considered to be low risk investments
What are Loans?
A loan is a form of debt that is availed by individuals or companies. A sum of money is borrowed from a lending institution for various purposes and is then repaid to the lender in installments at a specific rate of interest and over a pre-decided repayment period. There are many types of loans available in the market today such as education loans, personal loans, home loans, etc.
Benefits and Features of Loans
Given below are some of the salient features and benefits of loans -
- Most loans are secured loans i.e., they require collateral. However certain loans such as personal loans do not necessitate collateral and are provided at a slightly higher rate of interest
- The repayment term and interest rate may or may not be flexible and depend on various factors such as the reason for availing the loan, borrower’s credit score and income, principal amount, etc.
- Interest rate is the cost of availing the loan and can vary from institution to institution. Lower the interest rate, lower is the amount to be repaid. Interest rates vary based on multiple factors including changing market conditions
- In an ideal world, everyone will have adequate financial resources but since this is not a reality, loans are a boon
- Loans can be classified based on repayment terms such as short-term or long-term loans or even by their purpose such as home loans, education loans, personal loans, etc.
In Conclusion
Bonds and loans have a number of similar features and benefits but are not the same. From the perspective of a private individual, a bond is a debt instrument that can be purchased as a form of low-risk investment and one can receive an interest payment on the same. On the other hand loans are availed by private individuals when they require financial assistance and then repay the same to the lender along with an interest rate. Both are beneficial in their way and serve unique purposes. Choosing a debt instrument based on your requirements and financial goals is important.
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