Loan and debt, both link to the term money. Basically for a common man, both are liabilities that need to be paid off. Most people often use these words synchronously but they have a slightly different perspective.
Loan vs Debt
The main difference between loan and debt is that money borrowed from lender and bank is called loan, and money borrowed through debentures and bonds is called debt. Loans are easily available through some typical paperwork and there are various loan types according to your fit with their plans.
But then, you have a certain rate of interest that you need to pay monthly or might be penalized.
Debts are more easily obtainable and you can get any amount you want irrespective of your background. Some debts might not require a monthly interest to pay.
Comparison Table Between Loan and Debt (in Tabular Form)
| Parameter of Comparison | Loan | Debt |
|---|---|---|
| Character | When a person wants to flourish his business, build his own home, or want to study abroad he applies for a loan from a bank or any other financial institution. | Finally, when the man is hard-pressed by the loan amounts he asks for a debt from any individual to pay off his loan. |
| Scheme | Some amount of the principal is to be paid monthly along with the rate required. | Here the principal rate is paid at the maturity level with some interest at regular intervals or no rate at all. |
| Lender | The lender is primarily a Bank or other financial institution. | The lender can be any individual like your friend or a non- profit organization. |
| Flexibility | The lenders have set up some rules which you have to abide by or you shall be penalized. | You have the flexibility to pay whenever you are ready. |
| Security | They are safe and have options to reschedule your payments. | You can be threatened for not paying. |
What is Loan?
A loan is the amount of money, lent to you by nationalized banks, private banks, and other financial organizations and expected to be paid back with timely interest.
The exact amount of loan which you can get depends on your job type, your income, tax information, debt in the market, credits, and other factors.
Loans are usually safe and secured. Moreover, they have a pledge of an asset like – home, car, vehicle, and others. If you are unable to pay back, they take possession of your asset.
There are different types of loans –
- Student loans
- Mortgage loans
- Business loans
- Home loans
- Car loans
- Gold loans and others.
Advantages of loan:
Low-interest rates: Banks mainly provides manageable interests which are comfortable to pay than the frequently incoming threats of debt.
Tax benefit: When you use your loan for business, the interest that you pay is a tax deducible expenditure. Moreover, you do not require to share your profit to the lender.
Disadvantages of loan:
Collateral: Bank always ignores your credit score (how good it may be), and need to form some collateral. This is how they protect themselves in case you fail to return the sum of money.
Complicated: Applying for a loan is complicated as it requires a lot of physical paperwork. It may go up to months to process your request and approve it.
What is Debt?
Debt is the amount of money borrowed by the recipient from a particular individual, party, or a nonprofit organization.
You can return the principal amount any time you wish like with no or little interest that the individual has verbally mentioned before giving you the money.
Debts are usually taken when you are under a heap of bank loans.
There are different types of debts –
- Credit card debt
- Corporate debt
- Personal debt
- Medical debt
- Consumer debt and others.
Advantages of debt:
No qualification required: You can obtain a debt irrespective of your social status and tax information, unlike the banks.
Long-term: Debts can be a long term relationship with the lender. You can share a bit of your profit and take money again to enrich your business.
Disadvantages of debt:
Affect Credit rating: One important disadvantage of debt is significantly reduces your credit score, which puts a bad impression of you in the market. This might lead you to pay a higher rate of interest. Unsafe: Most debt lenders can be a fraud and you can involve yourself in a debt trap. Finally leading you to threats and even jail!
Main Differences Between Loan and Debt
The key differences between them are listed below:
- The sum of money that you borrow from a bank/financial organization is a loan and that which you borrow from a person or debenture is a debt.
- The loan does not affect your credit score but Debt affects your credit score
- The loan includes signing collateral (generally an asset) but Debt does not require collateral.
- All Loans are Debt but all Debts are not loans.
Conclusion
So, which one do you feel is the right fit for you – loan or debt? Always make sure that both these terms link to money and they expect you to return it at no cost.
The loan is offered by banks which are highly secured and they perform an end to end encryption as keeping your personal information secured is their top-notch.
Debts are always something tricky as they have no signed paper works. They can raise your interest rates whereas it is kept fixed in bank loans.
For personal growth or medical payments, debt can be a good choice over the loan. Again, for home loans or business, Loans are no doubt a great idea. Thus now you have a clear concept of these two financial terms. Choose wisely!
References
- https://dallasfed.frswebservices.org/~/media/documents/research/papers/1993/wp9312.pdf
- https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1475-679X.2008.00273.x