In day-to-day life, money and banking play a crucial role for everyone, and they are an inevitable part of survival. Banks provide people with many different types of financial products to manage their money.
People need money to survive for various beneficial purposes such as shelter, education, business, transport, etc.
To satisfy every individual’s needs, banks offer required finance as a bank loan which needs to be repaid within the given duration.
A bank is where we can safely and securely save our money with the benefit of interest income for a given duration; this is termed as a deposit.
The account is a unique identity of every customer allotted by the bank, and every deposit is mapped to a unique account. There are many similarities between the two. However, there are a few differences as well.
Both loan and deposit are time-bound, and related terms and agreements are associated with them, which need to be carefully comprehended by the customer.
Key Takeaways
- A loan is a financial agreement where a lender provides funds to a borrower, who is expected to repay the amount with interest. A deposit is when an individual or entity places money into a financial institution for safekeeping and potential interest earnings.
- Loans involve interest charges the borrower must pay back, whereas deposits earn interest for the depositor over time.
- Loans are a liability for borrowers and lenders, while deposits are an asset for depositors and a liability for financial institutions.
Loan vs Deposit
The difference between Loan and Deposit is that the deposit is a feature provided by the bank for the benefit of the customer investing the money for security and interest income benefits. In contrast, the loan is a feature the bank provides to customers who need financial assistance.
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Comparison Table
| Parameter of Comparison | Loan | Deposit |
|---|---|---|
| Purpose | The facility provided by any financial institution where any individual or business can avail it for financial assistance | The facility provided by banks where any individual or business can secure their money along with the interest income |
| Interest Rates | The loan provided by the banks will have simple or compound interest and time duration based on the type of loan. | The interest rate for deposit will vary based on the type of deposit |
| Prerequisite | Banks have specific prerequisites to sanction the loan, such as income, financial history, etc. | No prerequisite is required other than having a valid account and money to deposit |
| Tax Benefits | Some of the loans availed from the bank will have tax benefits | Certain deposit types will not provide tax benefits to the customer if premature withdrawal is made |
| Constraints | The loan should be repaid along with interest for the given time duration. If not, the accumulated amount will increase the repayment amount and time duration. | After maturity, the deposit amount can be withdrawn. Premature withdrawal will have some penalty and lowered interest income based on the type of deposit. |
What is Loan?
The loan is nothing but borrowing money by an account holder from the bank with a transparent agreement explaining the terms and duration for repayment. A bank loan is also termed a bank advance.
Most bank loans are given at an interest rate such that the account holders must pay the borrowed amount along with a certain percentage for the given duration based on the borrowed amount.
Based on loan types and the risk involved, loans are considered unsecured or secured. Secured loans need collateral security to get the loan sanctioned from the bank.
There are many types of loans in the current market. Some of them are listed below:
- Personal loan
- Credit card loan
- Home loan
- Car loan
- Two-wheeler loan
- Small business loan
- Overdraft
- Cash Credit
- Demand loans
- Agriculture loan
- Gold loan
- Loan against credit card
- Educational loan
- Term loan
- Loan against insurance schemes
- Loan against fixed deposits
- Loan against mutual funds and share
What is Deposit?
A deposit is an investment made by an account holder in a bank for security and gaining interest. These deposits will be helpful for an individual for future needs.
Some of the important characteristics of deposits are:
- Fixed-rate of interest – Even though there are market fluctuations, the interest rate fixed for the deposit will not change, and it will remain the same till the date of maturity.
- Safe investment option – The risk involved in bank deposits is significantly low in this changing economic world.
- Predetermined tenure – Bank will have many deposit plans with different time duration and interest rates. Investors can plan and choose the deposit plan based on the plan’s benefits.
- Interest payment frequency – Investors will be privileged to receive the interest income on or after the maturity date or at periodic intervals.
Bank deposit accounts are classified as follows:
- Savings bank account
- Current deposit account
- Fixed deposit account
- Recurring deposit account
Main Differences Between Loan and Deposit
- Loans and Deposits are financial products of banks to maintain adequate cash flow. They are beneficial and convenient to use for various reasons. The main difference between Loans and Deposit is that loans are debts availed from banks by individuals for their financial survival. In contrast, deposits are the money invested by individuals in financial institutions.
- Loans offer income to the bank as the principal amount is paid along with interest, but in the case of a deposit, the banks are liable to credit money in the form of interest to the customers.
- Approval of loans is subjected to the collateral security given by the individual in some instances, whereas deposits do not require collateral security from the individual.
- The sanctioning of loans can be denied or not approved by the banks, but the deposits done by the customers in their accounts cannot be rejected and have nothing to do with the bank’s approval.
- Loans can be short-term or long-term, depending on the duration and capability of the individual. In contrast, deposits are generally long-term and can be withdrawn at any given time at the individual’s disposition.
- https://lirias.kuleuven.be/retrieve/523439
- https://www.bcb.gov.br/Pec/Depep/Seminarios/2011_VISemRiscosBCB/Arquivos/2011_VISemRiscosBCB_14h30_OskarKowalewski.pdf
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
