A loan is a specified amount that is provided to an individual or firm by a financial institution like a bank or NBFC. Based on security, loans can either be secured loans (backed by collateral) or unsecured loans. Based on repayment, loans can be installment loans, time loans or demand loans. Unlike a regular loan, an advance is a credit facility that companies offer borrowers, to fulfill short-term fund requirements. Find out more about loans and advances in the above article.
In the financial world, two of the most common terminologies include “loans” and “advances”. Both loans and advances are closely associated with the concepts of time and money.
Loans and advances facilitate companies to fulfill fund-related obligations. Even though both share numerous resembling factors, they are different from each other in numerous ways. This article will shed light on what loans and advances are and list down some of the most prominent differences between them.
Difference Between Loans and Advances:
| Aspect | Loans | Advances |
|---|---|---|
| Nature | Loans are deemed debts by nature. | Advances are referred to as variants of credit facilities. |
| Process of Acquiring | Acquiring a loan involves a formal and structured process. There are numerous administrative procedures involved. | Acquiring a loan involves a comparatively flexible and less complicated process. The screening process of getting an advance is also less challenging. |
| Amount Limit | Since loans are generally taken to establish new businesses, finance higher education, invest in property, etc., banks grant high amounts. | Advances are deemed as forms of credit, and thus, the amount sanctioned by banks is significantly lower as compared to loans. |
| Payment Duration | Loans generally involve big amounts of funds, and thus, they feature longer tenures. Repayment tenures for loans can stretch for numerous years. | Advances involve smaller amounts of funds, and thus, their repayment period does not exceed a year. Repayment tenures for loans can be anywhere between three months and twelve months. |
| Interest Charged | The interest charged on a loan by any financial institution depends on its type and the sanctioned amount. In most cases, loans include a high interest amount. | Since the repayment tenure does not exceed twelve months, the interest charged on advances is significantly lower as compared to loans. |
| Security | Most loan-issuing financial institutions require customers to submit collateral. Customers can pledge collateral in the form of real estate, gold, etc. | Customers are not required to submit collateral when opting for an advance from a bank or any other financial institution. However, some lenders may ask for a form of security such as a fixed deposit. |
What are Loans?
A loan is any specified amount that is provided to an individual or firm by a finance company or organization. The borrower is obliged to pay the amount back to the lending company or organization in the future, along with an interest, either over a particular period or on a fixed date.
Every loan comes with a set of terms that both parties, i.e., the lender and the borrower, agree upon. No exchange of funds takes place before both parties mutually agree to the loan’s terms and conditions.
Both parties sign an official contract bearing the details of the loan. The contract generally includes details like the amount lent, the amount needed to be repaid, the total number of installments that the amount needs to be paid in, the repayment date or period, and the collateral, which is optional and depends on the type of loan.
Different Categories and Types of Loans:
Loans are generally based on two categories, security, and repayment. Here is a brief look at both categories:
Security-Based Loans:
- Secured Loans – This type of security-based loan is generally backed by collateral, which refers to any item of value that the loan lender can take away from the borrower if the latter fails to repay a loan according to the agreed-upon terms or the contract.
- Unsecured Loans – In an unsecured loan, there is no requirement for an asset or collateral to be pledged to the lender by the borrower. However, as opposed to secured loans, unsecured loans generally feature a higher rate of interest.
Repayment-Based Loans:
- Installment Loans – Installment loans include repayment of the loan in small amounts distributed over a period of time. Every payment includes added interest besides the lent amount.
- Time Loans – As the name suggests, time loans include repayment of the entire lent amount at the specified date. The repayment amount also includes added interest besides the loan amount.
- Demand Loans – Demand loans are repaid to the lender by the borrower as per the former’s request or demand. Hence, they do not have any set repayment date.
Some of the most popular types of loans include:
- Personal Loans
- Home Loans
- Commercial Loans
- Education Loans
- Car Loans
Where to Get a Loan:
Loans are very popular among the masses since they offer individuals and firms an easy way to acquire funds for numerous purposes. All major financial institutions, including banks and private finance companies, offer different types of loans. Moreover, numerous reputed online outlets offer the option to acquire loans without hassle.
An exceptional outlet to easily get loans for businesses is Yubi Loans. The renowned platform facilitates businesses to easily access funds at top-tier rates. The online platform boasts of over 3000+ borrowers and features 750+ trusted lenders. Moreover, the hassle-free loan disbursement process simplifies the process of acquiring a loan and adds to the excellent customer experience. There are multiple loan solutions readily available on the platform, ranging from short-term loans to working capital loans. Overall, it is a great platform for acquiring loans.
What are Advances?
Advances are categorized as loans that financial companies and organizations offer to other business entities or individuals to fulfill short-term fund requirements. Unlike a full-fledged loan, an advance is actually a credit facility that companies offer borrowers.
As opposed to Business loans, companies provide advances for a shorter duration, such as one year. The rules and regulations pertaining to advances are established by the Reserve Bank of India, as well as the financial organization lending the amount. The lending organization holds power to sanction advances as short-term loans, cash credit, purchases, etc.
Advances are facilitated to the companies under:
- Primary Security: Primary security includes hypothecation of debtors, promissory notes, etc. In the case of advances, the lending company holds the priority when it comes to repayment of the loan, i.e., it ranks above other private debt holders.
- Collateral Loan: A collateral loan refers to a secured loan that facilitates borrowers to pledge any of their assets to seek another loan. Depending on how much value the collateral holds, the loan’s amount is sanctioned. Collateral loan in terms of advances includes mortgage of property, machines and numerous other fixed assets.
- Guarantees: A financial guarantee is a contract-based promise that is made by financial organizations such as banks, insurance companies, etc., to ensure payment of a debt obligation of another individual or firm. Advance guarantees are generally provided by partners, promoters, etc.
Different types of bank advance:
There are numerous types of bank advances. Here are some of the most popular ones:
- Cash Credit: Cash credit refers to the type of advance wherein customers can borrow funds by putting forth the security of tangible assets. Every bank has a “cash credit limit,” which determines the limit of funds that any customer wishing to get a loan can acquire.
- Short-Term Loans: As the name suggests, banks offer funds to customers for a short time. The entire amount of the loan is sanctioned and provided to the customer at once and not in periodic installments.
- Bill Purchases : Bill purchases are a variant of advances offered by banks wherein the customers pledge their bills to the bank and receive a set amount in return.
Final Words on Loans and Advances
Overdraft is a facility provided by the bank to the customers, wherein the latter can withdraw funds from their account up to a limit. This facility is provided to the customers for a limited period. The customer is allowed to withdraw money whenever required as long as they do not cross the set threshold.
