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Know The Key Differences Between Loans & Bonds

Know The Key Differences Between Loans & Bonds

Loans and bonds are common terms used in the context of managing finances. While bonds are issued by companies when they require funding, loans are extended to borrowers for their personal needs. Both are based on debt. However, unlike a loan, a bond is an investment option.

In this article, let us understand what bonds are, what loans are, and the difference between bond and loan.

What are bonds?

Fundamentally, bonds are investment options for fixed-income earners. When you purchase or invest in a bond, you lend money to the issuing institution, which pays them interest as returns. The purpose of bonds is to raise capital. Businesses, organizations, and the government often issue bonds and sell iOUs to the public.

The money collected is then used for business operations and projects. Meanwhile, those who have purchased bonds receive variable or fixed interest payments over a period of time, called a coupon.

Bonds have a fixed tenure. When the tenure ends, the investors also receive their principal amount back.

What are loans?

When you take a loan, you borrow a sum of money with the promise to repay it with interest. Lenders first check your creditworthiness and then decide whether to give you the money you want. If you are an eligible candidate, the lender will approve your application and offer you their loan terms.

Today, several banks and NBFCs offer loans for various purposes, such as:

  1. Home loans
  2. Personal loan
  3. Consumer-durable loans
  4. Auto loans
  5. Home renovation loans
  6. Agricultural loans or agro loans

Loans vs bonds

ParametersBondsLoans
MeaningA bond is a fixed-income instrument that generates returns through interest payments.A loan is a debt instrument that allows you to borrow money. You will have to repay your loan to your lender with interest.
Rates of interestBonds can have fixed or variable interest rates.Loans can have fixed or floating interest rates. The rates also depend on your creditworthiness and the type of loan. Secured loans have lower rates of interest than unsecured loans.
SourceYou can buy and sell bonds through bond markets. The prices can vary based on various factors.Loans are offered by banks, NBFCs, and lenders. The loan terms depend on the discretion of the issuer.
TenureBonds are typically long-term investmentsThey can be long-term or short-term.
TermsThe bond issuing company or organization announces the terms of the bonds. They are the same for all investors who wish to purchase a bond.The lender, bank, or NBFC decides the loan terms.   Loan terms can vary according to the borrower’s eligibility and creditworthiness. If you qualify as a creditworthy borrower, your lender may offer you preferential loan terms like a higher loan amount, affordable interest rates, and a longer tenure.  

Loans vs bonds: In summary

Bonds are fixed-income instruments you can use to generate returns. If you have a low-risk capacity and want low but guaranteed returns, you can invest in government bonds. But, if your risk appetite is high, you can enjoy high returns by investing in corporate bonds.

Loans are finance products designed to help individuals and companies borrow a sum of money, which they have to pay back with interest. You can take a loan for a variety of purposes, such as financing a home, starting a business, or funding your child’s education. Opt for Tata Capital Loans at competitive interest rates for all your needs & purposes.

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