Difference Between a Loan and an Advance

Loans and advances might seem like similar forms of credit.

What is a Loan?

A loan is a sum of money or debt that is provided by a bank or a financial institution to borrowers or business establishments when they require it. There are different types of loans that one can apply for depending on the needs.

What is an Advance?

An advance is a sum of money or credit provided by a bank or a financial institute to any business establishment or individual for short-term requirements. Advances are given to the borrower as working capital. In easy terms, an advance is a form of credit that is given to cover daily funds such as salary, wages, and so on. It is provided for a short-term duration and is usually considered a short-term loan, cash credit, bill purchase, or an overdraft.

Major Differences Between Loans & Advances

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.

Conclusion

Now that you are aware of advances and loans, you can opt to get one as per your requirements. For short-term requirements, you can opt for advances and clear off the debt within a year. But, if you wish to buy a house or a car, you can opt for loans with low-interest rates. However, no matter which forms of debt you take, you must make sure to clear your EMIs on time to avoid getting penalized. Also, not paying your dues on time will hamper your CIBIL score and make it challenging for you to get another loan in the future (if you need one).

If you are looking for a personal loan of up to Rs. 5 lakh that is disbursed within 24 hours and comes with attractive rates of interest, apply for a Money View personal loan today.