Loan and Advance both are financial terms related to economical welfare. 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 Advance
The main difference between loan and advance is that loan is given by banks with interest to be returned whereas an advance is an early payment from the employer’s salary.
A loan is an amount borrowed for specific financial needs like investing in assets, purchasing consumer durable, constructing a building, making payments, or fulfilling financial obligations so that business processes can run smoothly.
An advance is generally given by an employer to the employee for meeting short-term financial needs. An advance is usually deducted from the employee’s monthly salary. Advances are also provided by banks to organizations or business owners for meeting their capital requirements.
Comparison Table Between Loan and Advance (in Tabular Form)
| Parameter of Comparison | Loan | Advance |
|---|---|---|
| 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. | When the man is in short term financial need he can take an advance which is deducted from his salary. |
| Interest Rate | Some amount of the principal is to be paid monthly along with the rate required. | Here, no interest is paid only some money from the earned salary is withdrawn early. |
| Lender | The lender is primarily a Bank or other financial institution. | The lender is the employer of the company where he is working. |
| Time | The nature of the loan is long. It can have a long term relationship with the bank. | Advance is usually for a short period or at least one year. |
| Security | They are safe but you may come under debt and collateral agreement. | Advances are always safe as it does not include any debt or collateral agreement. |
What is Loan?
The 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 Advance?
Advance is most commonly provided by the company to the employer, customer to the business office or even banks. An advance is usually deducted from the employee’s monthly salary.
When a fund is provided by the bank or any financial organization to a business company or an individual for a specific purpose that is to be repayable after a short period is also known as advances.
There are different types of loans –
- Short term transaction
- Overdraft
- Bill Purchase
- Cash credit
Advantages of advance:
No interest rate: You can ask for an early withdrawal of a part of your income for financial needs, but there is no interest to pay.
Short-term: Advances are usually a short term relationship and in rare cases, it can last up to one year.
Disadvantages of advance:
Financial loss: It gives you some cash from your income or salary to meet the needs. At the end of the month, you may receive the deducted money which again may not fulfill financial needs.
Credit Score: Advances regularly may decrease your credit score ultimately leading to economical loss.
Main Differences Between Loan and Advance
The key differences between them are listed below:
- Loans are the origin of long-term finance engagement and are typically more than one year, whereas the advances are the origin of short-term finance engagement.
- The economical value of an advance is usually less than that of a loan.
- As advances are in the form of short duration, there is no or negligible rate of interest on them. But loans have a monthly interest rate which may or may not rise.
- The legal formalities and collateral assignments involved in loans are life-threatening but there is no such issue in advance payments.
- All Loans are Advances but all Advances are not loans.
Conclusion
So, which one do you feel is the right fit for you – loan or advance? 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.
For personal growth or medical payments, advances 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://link.springer.com/chapter/10.1007/978-981-13-1498-8_53
- https://pdfs.semanticscholar.org/0e99/6238a801436a2d72882ddd0c0317a1ef5ab4.pdf
- https://www.nber.org/papers/w5660.pdf