What is the Difference Between Loan and Advance?
🆚 Go to Comparative Table 🆚The main difference between a loan and an advance lies in their purpose and repayment tenure. Here are the key differences between the two:
- Purpose: Loans are typically used for long-term financing needs, such as purchasing a property, a vehicle, or investing in research and development. In contrast, advances are used for short-term financing needs, such as paying for inventory or covering expenses until the next payment cycle.
- Repayment Tenure: Loans generally involve larger amounts of funds and have longer repayment tenures, often stretching for numerous years. Advances, on the other hand, involve smaller amounts of funds and have shorter repayment periods, typically not exceeding a year.
- Interest and Risk: Loans usually have higher interest rates and can be secured or unsecured, depending on the lender's requirements. Advances are considered forms of credit and typically have lower interest rates, as they carry less risk due to their shorter repayment periods.
- Legal Formalities: Loans often involve more legal formalities compared to advances, as they are longer-term financial commitments.
Some common types of advances include:
- Short-term loans: The full amount is disbursed to the borrower at once, and the loan tenure for repayment is typically shorter.
- Overdraft: A facility provided by the bank that allows a customer to overdraw money from their account up to a certain limit.
- Cash Credit: A facility granted by the bank that allows the customer to borrow money up to a certain limit against collateral.
- Bill Purchase: An advance facility provided by the bank against the security of bills or invoices to be paid to the borrower.
Comparative Table: Loan vs Advance
Here is a table summarizing the differences between loans and advances:
Feature | Loans | Advances |
---|---|---|
Meaning | Funds borrowed by an entity from another entity, repayable after a specific period carrying interest rate | Funds provided by the bank to entities for short-term purposes, usually repayable within one year |
Purpose | Long-term finance for various purposes | Short-term finance for covering daily fund requirements, salary, wages, purchasing raw materials, etc. |
Repayment Period | Long-term, usually more than 5 years | Short-term, typically within 1-2 months |
Interest | Charged on the entire loan amount, calculated on an annual basis | Interest may be charged on the withdrawn amount only, and the remaining balance may not incur interest |
Source | Financial institutions, banks | Banks, financial institutions |
Types | Term loans (payable after 3 years), demand loans (payable within 3 years) | Overdraft, cash credit, bills purchased |
Loans are typically used for long-term financing purposes, while advances are provided by banks to cover short-term fund requirements for businesses.
Read more:
- Loan vs Borrow
- Grant vs Loan
- Loan vs Debt
- Loan vs Mortgage
- Loan of Credit vs Line of Credit
- Debenture vs Loan
- Bank Overdraft vs Bank Loan
- Loan vs Lease
- Bond vs Loan
- Lending vs Borrowing
- Shares vs Loan
- Term Loan vs Working Capital Loan
- Lending Rate vs Borrowing Rate
- Secured Loans vs Unsecured Loans
- Fixed vs Variable Loans
- Long-term vs Short-term Financing
- Mortgage vs Home Equity Loan vs Home Loan
- Collateral vs Mortgage
- Debt vs Equity