Loan vs Advance: Difference and Comparison

Loan and Advance are both financial terms related to economic welfare. For an ordinary man, both liabilities must be paid off.

Most people use these words synchronously but have a slightly different perspectives.

Key Takeaways

1. Loans are formal financial agreements involving borrowed funds with a set repayment schedule and interest rate. At the same time, advances are short-term credit extensions, provided by banks, with a more flexible repayment structure.
2. Loans are used for larger expenses, such as buying a house or car, whereas advances are used for meeting short-term cash flow needs, like a business dealing with a temporary cash crunch.
3. The interest rate on loans is generally lower than that of advances due to the longer repayment period and lower risk involved for the lender.

Loan vs Advance

A loan is a borrowed sum of money that is expected to be paid back with interest over a specified period, involving regular repayments. An advance is a payment that is received or paid before the agreed-upon time, such as a salary advance or a cash advance on a credit card.

A loan is an amount borrowed for specific financial needs like investing in assets, purchasing consumer durable, constructing a building, making payments, or fulfilling financial obligations so that business processes can run smoothly.

An employer generally gives an advance to the employee for meeting short-term financial needs. An advance is deducted from the employee’s monthly salary.

Banks also advance organizations or business owners to meet their capital requirements.

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Comparison Table

Parameter of Comparison	Loan	Advance
Character	When a person wants to flourish his business, build his own home, or want to study abroad, he applies for a loan from a bank or any other financial institution.	When the man is in short-term financial need, he can deduct an advance from his salary.
Interest Rate	Some principal amount is to be paid monthly along with the rate required.	Here, no interest is paid. Only some money from the earned salary is withdrawn early.
Lender	The lender is primarily a Bank or other financial institution.	The lender is the employer of the company where he is working.
Time	The nature of the loan is extended. It can have a long-term relationship with the bank.	Advance is for a short period or at least one year.
Security	They are safe, but you may come under a debt and collateral agreement.	Advances are always safe as it does not include any debt or collateral agreement.

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What is Loan?

The loan is the amount of money lent to you by nationalized banks, private banks, and other financial organizations and is expected to be paid back with timely interest.

The exact amount of loan you can get depends on your job type, income, tax information, debt in the market, credits, and other factors.

Loans are safe and secured. Moreover, they have a pledge of an asset like – a home, car, vehicle, and others. If you cannot pay back, they take possession of your purchase.

There are different types of loans –

1. Student loans
2. Mortgage loans
3. Business loans
4. Home loans
5. Car loans
6. Gold loans and others.

Advantages of loan:

Low-interest rates: Banks mainly provide manageable interests that are more comfortable to pay than the frequently incoming debt threats.

Tax benefit: When you use your loan for business, the interest that you pay is a deducible tax expenditure. Moreover, you do not require to share your profit with the lender.

Disadvantages of loan:

Collateral: Bank always ignores your credit score (how good it may be) and need to form some collateral. This is how they protect themselves if you fail to return the money.

Complicated: Applying for a loan is complex as it requires a lot of physical paperwork. It may go up to months to process your request and approve it.

 

What is Advance?

The company most commonly provides advance to the employer, customer to the business office or even banks. An advance is deducted from the employee’s monthly salary.

When a fund is provided by the bank or any financial organization to a business company or an individual for a specific purpose to be repayable after a short period is also known as an advance.

There are different types of loans –

1. Short term transaction
2. Overdraft
3. Bill Purchase
4. Cash Credit

Advantages of advance:

No interest rate: You can ask for an early withdrawal of a part of your income for financial needs, but there is no interest to pay.

Short-term: Advances are short-term relationships; in rare cases, they can last up to one year.

Disadvantages of advance:

The financial loss gives you cash from your income or salary to meet your needs. At the end of the month, you may receive the deducted money, which again may not fulfil your financial needs.

Credit Score: Advances regularly may decrease your credit score, ultimately leading to economic loss.

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Main Differences Between Loan and Advance

The key differences between them are listed below:

1. Loans are the origin of long-term finance engagement, more than one year, whereas advances are the origin of short-term finance engagement.
2. The economic value of an advance is less than a loan’s.
3. As advances are short-duration, they have no or negligible interest rates. But loans have a monthly interest rate which may or may not rise.
4. The legal formalities and collateral assignments involved in loans are life-threatening, but there is no such issue in advance payments.
5. All Loans are Advances, but all Advances are not loans.

References

1. https://link.springer.com/chapter/10.1007/978-981-13-1498-8_53
2. https://pdfs.semanticscholar.org/0e99/6238a801436a2d72882ddd0c0317a1ef5ab4.pdf
3. https://www.nber.org/papers/w5660.pdf