In day-to-day life, money and banking play a very crucial role for all the people and they are an inevitable part of survival. Banks provide many different types of financial products to the people to manage their money.
People need money to survive for various beneficial purposes such as shelter, education, business, transport, etc. For satisfying the needs of every individual, banks are offering required finance as a bank loan which needs to be repaid within the given duration.
A bank is a place where we can safely and securely save our money with the benefit of interest income for the given duration, this is termed as a deposit. The account is a unique identity of every customer allotted by the bank and every deposit is mapped to a unique account.
There are many similarities between the two, however, there are a few differences as well. Both loan and deposit are time bounded and there are related terms and agreements associated with it which need to be carefully comprehended by the customer.
Loan vs Deposit
The main difference between Loan and Deposit is that the deposit is a feature provided by the bank for the benefit of the customer investing the money for security and interest income benefits, whereas, the loan is a feature provided by the bank to the customers who need financial assistance.
Comparison Table Between Loan and Deposit (in Tabular Form)
| Parameter of Comparison | Loan | Deposit |
|---|---|---|
| Purpose | The facility provided by any financial institution where any individual or business can avail it for financial assistance | The facility provided by banks where any individual or business can secure their money along with the interest income |
| Interest Rates | The loan provided by the banks will have simple or compound interest and time duration based on the type of loan | The interest rate for deposit will vary based on the type of deposit |
| Prerequisite | Banks have certain prerequisites to sanction the loan such as income, financial history, etc. | No prerequisite required other than having a valid account and money to deposit |
| Tax Benefits | Some of the loans availed from the bank will have tax benefits | Certain deposit types will not provide tax benefits to the customer if premature withdrawal is done |
| Constraints | The loan should be repaid along with interest for the given time duration. If not, the accumulated amount will increase the repay amount and time duration | After maturity, the deposit amount can be withdrawn. Premature withdrawal will have some penalty and lowered interest income based on the type of deposit |
What is Loan?
The loan is nothing but borrowing money by an account holder from the bank with a transparent agreement explaining the terms and duration for repayment. A bank loan is also termed as a bank advance.
Most of the bank loans are given at an interest rate such that the account holders need to pay the borrowed amount along with a certain percentage for the given duration based on the borrowed amount.
Based on loan types and the amount of risk involved, loans are considered as either unsecured or secured loans. Secured loans need collateral security to get the loan sanctioned from the bank.
There are many types of loans in the current market. Some of them are listed below:
- Personal loan
- Credit card loan
- Home loan
- Car loan
- Two-wheeler loan
- Small business loan
- Overdraft
- Cash credit
- Demand loans
- Agriculture loan
- Gold loan
- Loan against credit card
- Educational loan
- Term loan
- Loan against insurance schemes
- Loan against fixed deposits
- Loan against mutual funds and share
What is Deposit?
Deposit is an investment made by an account holder in a bank for security and gaining interests. These deposits will be helpful for an individual for future needs.
Some of the important characteristics of deposits are:
- Fixed-rate of interest – Even though there are market fluctuations, the interest rate fixed for the deposit will not change and it will remain the same till the date of maturity.
- Safe investment option – The risk involved in bank deposits is significantly low in this world of changing economy.
- Predetermined tenure – Bank will have many deposit plans with different time duration and interest rates. Investors can plan and choose the deposit plan based on the plan’s benefits.
- Interest payment frequency – Investors will have the privilege to choose the option of receiving the interest income either on or after the maturity date or at periodic intervals.
Bank deposit accounts are classified as follows:
- Savings bank account
- Current deposit account
- Fixed deposit account
- Recurring deposit account
Main Differences Between Loan and Deposit
- Both Loan and Deposit are financial products of banks to maintain adequate cash flow. They are beneficial and convenient to use for various reasons. The main difference between Loans and Deposit is that the loans are debts availed from banks by individuals for their financial survival whereas deposits are the money invested by individuals in financial institutions.
- Loans offer income to the bank as the principal amount is paid along with the interest but in the case of a deposit, the banks are liable to credit money in the form of interest to the customers.
- Approval of loans is subjected to the collateral security given by the individual in certain cases whereas the deposits do not require collateral security from the individual.
- The sanctioning of loans can be denied or not approved by the banks but the deposits done by the customers in their accounts cannot be rejected and do not have anything to do with the approval of the bank.
- Loans can be short term or long term depending on the duration and capability of the individual whereas deposits are generally long term in nature and can be withdrawn at any given time at the disposition of the individual.
Conclusion
There are multiple forms of debts available in the market that is designed to meet immediate and temporary cash requirements in more favourable ways. Availing a loan is one such means by which the cash flow can be maintained.
Deposits are done by individuals for securing their finance in a safe institution on their willingness. Loan and deposit are the major features of a bank and both are beneficial if the necessity and purpose are understood properly. Obtaining loans from the banks can help to maintain the financial needs and deposits are an asset of the individual or business.
References
- https://lirias.kuleuven.be/retrieve/523439
- https://www.bcb.gov.br/Pec/Depep/Seminarios/2011_VISemRiscosBCB/Arquivos/2011_VISemRiscosBCB_14h30_OskarKowalewski.pdf