The terms ‘debt’ and loan’ are used interchangeably but what is the difference? Are they similar? Let us explore the same below.
| Loans | Debts |
|---|---|
| Money/funding availed by an individual or a business | Funding availed mainly by businesses by issuing bonds, stocks, debentures |
| Loan amount is provided by a bank, NBFC, or other lenders | Funding is provided by the general public that purchases the issued bonds, debentures, etc. |
| Repayment is in the form of EMIs and consists of both principal as well as interest amount | Repayment is in the form of regular interest payments with principal amount being paid only at maturity |
| Paying off a loan on time can help increase the borrower’s credit score | Purchasing a bond is a form of investment as he/she can receive regular interest payments |
A loan is generally an amount of money, property, or other goods that is given in exchange for the repayment of the amount along with interest, i.e., principal and interest in the future. There are different types of loans available in the market such as education loans, personal loans, auto loans, etc and while their features and benefits can vary, a loan is supposed to be repaid generally within a set period of time.
Loans can be further classified into secured and unsecured loans. If you need to provide collateral or guarantor to avail a loan, it is a secured loan. Unsecured loans on the other hand do not require a guarantor or any form of security.
Did you know that large businesses could raise funding in ways other than availing a loan? Many large companies issue bonds or debentures to the general public to raise money and repay the same in the form of interest. In this way, the ones who purchase the bond can earn interest regularly.
Another meaning associated with the term ‘debt’ is when it refers to the amount of money that is owed by a borrower to a lender. These could be credit card debts, mortgages, loans etc. This debt can also be classified into good and bad debt where in good debt is money owed for things that can help increase one’s wealth over time and a bad debt is when money is owed for items that do not help increase one’s wealth.
For the purpose of this article, we will refer to the first meaning of debt.
At the outset, there is no major difference between the two as loans are a part of debt and the amount of money borrowed needs to be repaid in both cases. However, there could be differences in terms of the nature of the loan or debt availed, repayment terms, etc.
Generally, when one requires monetary funds for personal reasons such as education, health, vacation etc. or for a business venture, the applicant can approach a bank or other lenders for a loan.
Businesses on the other hand can raise capital in ways other than availing a loan. For example, they can issue stocks, bonds, or debentures to the general public to raise funds. This is generally considered to be a debt.
Additionally a loan is repaid in the form of installments known as EMIs or Equated Monthly Installments. The amount includes the principal and interest. The amount varies depending on the interest rate imposed as well as the repayment term chosen. However, when it comes to repaying debt as a result of issuing bonds and debentures, only the interest amount is paid back at regular intervals and the principal amount is repaid only at maturity.
At first glance, there seems to be no major difference between loans and debts. However, there are unique characteristics of each that can be found once we dig deeper. If you wish to avail a loan, then remember that you will have to ensure its timely repayment else your credit score will be severely affected. However, if you wish to purchase a bond, then you can consider the same as a form of investment that will pay you regular interest.
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