Difference Between a Loan and an Advance

Formality

• Loans: The process of getting a loan is formal and structured. Even before applying for a loan, one needs to get through various administrative procedures. Only if the applicant fulfills the criteria will his/her application get accepted. The applicant also has to pass a screening process that is usually strict in nature. The screening process is carried out to check whether or not the individual will be able to repay the loan and the interest amount on time.
• Advances: Advances are approved only if the borrower satisfies the pre-defined requirements that can involve submitting collateral, enlisting primary security, and so on. The screening process is also less challenging than that of a loan. As a result, advances are easier to get sanctioned as the procedures involved are less than that of a loan.

Amount Involved:

• Loans: When a business establishment or an individual applies for a loan, the amount borrowed from a bank or a financial institution is usually big. Loans are mostly taken to set up new businesses, to finance higher education, to buy property, and for other such significant and long-term expenses.
• Advances: An advance is a form of credit. And so, the amount sanctioned is also smaller as compared to any type of loan amount. It is given to fulfill short-term financial requirements.

Payment Duration

• Loans: The repayment tenure for loans can stretch for years. Home loans, auto loans, car loans, and even personal loans, can have a long repayment tenure. For example, the loan term for a home loan can be 5 years and go up to 30 years. Apart from the borrowed sum, the individual will also have to pay the interest rate levied on the loan amount. The borrower can clear off his loan by making monthly payments or EMIs.
• Advances: The repayment period for advances does not go beyond a year. It can start from 3 months to a year.

Interest

• Loans: Banks or financial institutions charge interest rates on the sanctioned loan amount. The interest rates depend on the loan amount, loan repayment duration, and various other factors. It is levied to cover the risks that are related to providing the loan amount. The borrower must pay the interest rate apart from the principal amount across the loan repayment term.
• Advances: The interest rate charged on an advance is low if compared to a loan, as the repayment tenure does not go beyond a year. As a result, the risks associated with an advance are not high as the sanctioned amount is also small.

Security

• Loans: When banks or financial institutes approve your loan, they can ask you to submit collateral, especially if your loan amount is high. The collateral is taken as a form of security that the bank can seize if you do not pay your EMIs for a certain period of time. You can deposit collaterals in the form of your house, land, gold, etc.
• Advances: Advances do not require you to submit collaterals. However, this can vary from lender to lender. Some lenders might ask you to submit your fixed deposit as a form of security.

Types of Advances and Loans

Advances can be segregated into the following types:

• Short-term loan: When an advance is considered a short-term loan, the borrower can collect the full amount at one time.
• Overdraft: The bank allows the borrower to overdraw money up to a specified limit from his/her bank account.
• Bill Purchase: The borrower has to pledge bills to get the advance.
• Cash Credit: The bank allows the borrower to get advance money without keeping any credit balance.

Loans can be segregated into two types:

• Secured loans: If a customer takes a secured loan, then he/she will have to submit collateral. The collateral or security can be seized by the lending institute if the borrower becomes a defaulter.
• Unsecured loans: Unsecured loans are sanctioned without the requirement of any collateral. Personal loans can be considered unsecured loans. Usually, the rate of interest charged for unsecured loans is also higher.