Loan vs Advance
In times of financial difficulties, individuals/corporations find means from which they can obtain extra funding to fulfill their personal needs, business commitments, investments, etc. There are a few options that can be explored which are to take out a loan or an advance in order to fulfill obligations. Whether a loan is taken out or advance is obtained will depend on the time period for which the money is needed, the amount of money that is needed, and the individual/corporation’s other requirements. The article that follows provides a clear explanation of loans and advances and highlights their similarities and differences.
Loan
A loan is when one party (called the lender, which is usually a bank or financial institution) agrees to give another party (called the borrower) a sum of money that is to be paid back after a certain period of time. The lender will charge the borrower an interest on the money that has been lent and will expect the interest payments to be made on a periodic (usually monthly) basis. At the end of the loan term, the full repayment of the principal and interest should be made. The terms of the loan should be set out in a loan contract which lays out the terms for repayment, interest rates, and deadlines for payment.
Loans are taken out for a number of reasons such as to purchase vehicles, to pay college tuition, mortgages to purchase housing, personal loans, etc. Lenders such as banks and financial institutions usually test the borrower’s credibility before lending funds. There are a number of criterion that should be met by the borrower; which include credit history, salary/income, assets, etc. Lenders also require an asset to be pledged as collateral, which will be liquidated and proceeds will be used to recover losses in the event that the borrower defaults.
Advance
An advance is a credit facility that is provided to an individual/corporation by the financial institution, bank, employer, friend, relative etc. Advances are generally for shorter term and will be recovered by the bank during a shorter period of time. Advances are commonly taken on an employee’s salary. For example, an employee who receives a weekly salary for $1000 may request a $500 advance (on his next week’s salary) to be paid now. The employer will then pay the employee $500 next week instead of the $1000.
Advances usually do not carry an interest payment and, therefore, it can be a cheaper and convenient method for obtaining some extra cash on a short term. Advances are usually less formal and do not require any collateral to be pledged. In the instance where an advance is provided without a contract or collateral (which is usually the case), this will be based on the relationship between the two parties.
What is the difference between Loan and Advance?
Loans and advances are generally used for the same purpose; to obtain some extra funding during times of financial difficulties. Despite the fact that both loans and advances can reduce the pressure of the financial burden temporarily (short term or long term), they both need to be paid back. There are a number of differences between the two. A loan is treated as a debt where a lender such as a bank will formally lend funds to a borrower. An advance is a credit facility which is usually less formal than a loan. A loan requires an asset to be pledged as collateral, whereas this is not the case for advances. Loans are also for a longer period of time, and need to be repaid with interest. Advances are taken for shorter time periods, and interest is not charged on the amount borrowed.
Summary:
Loan vs Advance
• Loans and advances are generally used for the same purpose; to obtain some extra funding during times of financial difficulties.
• A loan is when one party (called the lender, which is usually a bank or financial institution) agrees to give another party (called the borrower) a sum of money that is to be paid back after a certain period of time.
• An advance is a credit facility that is provided to the individual/corporation by the financial institution, bank, employer, friend, relative etc.
• A loan is treated as a debt where a lender such as a bank will formally lend funds to a borrower, whereas an advance is a credit facility, which is usually less formal than a loan.
• A loan requires an asset to be pledged as collateral, whereas this is not the case for advances.
• Loans are for a longer period of time, and need to be repaid with interest while advances are taken for shorter time periods, and interest is not charged on the amount borrowed.