Request A Callback

Need Help? Request a Callback
Bakshi House 40-41 (Near Chiranjiv Tower), Nehru Place, New Delhi, Delhi 110019
07:30 am – 05:30 pm Mon-Fri
Secure your future with just few steps.
Need Help? Request a Callback
Bakshi House 40-41 (Near Chiranjiv Tower), Nehru Place, New Delhi, Delhi 110019
07:30 am – 05:30 pm Mon-Fri
What is the difference between a loan and an advance?

A loan is an amount borrowed for specific financial needs like investing in assets, purchasing consumer durables, constructing a building, making payments or fulfilling financial obligations so that business processes can run smoothly. A loan is offered in the form of a debt by a lender or a financial institution with a predetermined interest rate. The terms and conditions of a loan are established in a contract form which includes the interest rate and the repayment tenure.

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. Advances require that the repayments are made within one year.

Here are the Key Differences between Loans and Advances

Loans and Advances

A loan can be further subdivided into 3 categories on the basis of

  1. Security
    1. Secured - backed by an asset, security, or collateral
    2. Unsecured - Needs no guarantee
  2. Repayment
    1. Demand – to repaid as per the demand of the lender
      1. EMI – to be repaid in equated monthly installments
      2. Timed – to be repaid in full at a future date that is predetermined
  3. Purpose
    1. Car loan
    2. Home loan
    3. Education loan
    4. Business loan
    5. Personal loan

Short-term advances can also be subdivided into the following 3 categories:

  1. Security
    1. Primary security - Hypothecation
    2. Guarantees - Given by directors or business partners
    3. Collateral Security - Mortgage
  2. Purpose
    1. Cash Credit – provided by the bank where the borrower can get advance money against a pledged asset up to a specified limit
      1. Overdraft – allows the borrower to overdraw capital up to a certain limit
    2. Bills – A facility provided by the bank to businesses against the security of bills

Now that you know the key differences between loans and advances along with their associated terms, you should be able to make a sound financial decision when borrowing funds for your personal or professional needs.