Whenever the companies or individuals are in financial trouble, they seek help from the financial institutions such as banks. The financial help to make the business/individual stable for the particular operation or function can be of two types; loan and advance. People often find it difficult to differentiate between both these financial aids provided by the banks or the other available financial institutions. The loan is the financial debt that is provided by the bank for a particular period; the interest do apply on the amount lent, and collaterals are also pledged. On the other hand, the advance is the credit facility that is provided by the bank for a relatively shorter time as compared to that of loans. It doesn’t even require the collateral or any official contract between the borrower and the lender.
What are Loans?
The loan is the financial aid or debt that is provided by the financial institution such as a bank. The terms and condition and are already decided by the borrower and the lender, and the formal contract is also made in between the lender and the borrower. The loan is to be returned by the borrower in the particular time which is mostly 1-5 years, although it can vary in accordance with the nature of the loan and due to the mutual choice of the borrower and lender. The small-sized loans by the individuals or the less-fortunate are taken from the microfinance institutes; the interest rate is quite low as compared to the interest rate applied by the banks to the persons and companies. Both the companies and individuals can get the loan as per their demand; as much the period of the loan will increase, the interest rate will also rise. The banks issue the loans after checking the credit history, employment, earning, and business repute of the firm or the individual. Those who are a defaulter of the state or have bad repute aren’t offered the loan. Keeping in mind the need of individuals, the banks nowadays also offer small-sized loans for the certain period. Some of the basic types of loan offered to the individuals are Car loan, Study Loan, Home Loan and others. The interest rate and the period for the return of loan vary in each of the cases.
What are Advances?
Advance is the credit facility that is provided by the financial institution/banks for a short time. Usually, no interest is applied to the institutions as they are offered to the reputable/gold customers for the shorter time. To get an advance, the borrower doesn’t have to undergo the long process of application, collateral and then official contract with the lender. The term advance is mostly used to express the salary taking by the employee in advance. For example, an employee works in the firm for $10k monthly; he takes $5k of advance salary before the end of the month due to some emergency, this is known as the advance. No interest is usually applied on the amount lent to the borrower, and it is returned within the short time. The advance is the convenient method for an employee to get extra cash upon need without bearing any interest or getting in official contract with the borrower. The flow of advance is mainly dependent on the relation between both the parties, borrower and the lender.
Loans vs. Advances
- The loan is the financial aid or debt that is provided by the financial institution such as a bank, whereas advance is the credit facility that is provided by the financial institution/banks for a short time.
- As the loan is the debt, the interest is applied to it by the lender. On the other hand, no interest is applied on the advance as it is the credit facility for quite a shorter time.
- The official contract is also made in between the lender and the borrower after deciding the terms and conditions while in advances such formalities aren’t required.
- The collateral pledge is compulsory when an individual or the company is taking the loan, whereas it is not required in the case of advance.