Lending systems were available as old as 3000 years before. One of the earlier forms of lending systems were pawnbroking, a system of collecting collateral to offer money in return.
Lending is the process of giving money to the borrower to get it paid back with interest. The interest for the amount availed is pre-defined. The payback methods were also varied. In certain cases, the money is borrowed and for that equivalent amount of goods is given as security measure.
In a few cases, the money is borrowed, and it is returned by working for the person on the farm or the field. The period for working is also pre-defined.
With time, when the banking system evolved to its independent structure, it offered loans to individuals and businesses. In return, the individuals and the business owners paid back the amount with interest.
The amount of money borrowed is decided by the bank upon the customer’s request and also the eligibility criteria that the bank has set for the loans. The payback terms are also decided by the bank which includes the rate of interest and the duration within which the loan has to be cleared.
The two important banking business terminologies are Loan and EMI. They both are interconnected in the business form, however, there are differences between the two.
Loan vs EMI
The difference between the Loan and EMI is the transaction method. A loan is a monetary support offered by the bank to the customer while EMI is the payback norm to return the funds in a fixed period at a fixed interest rate.
Comparison Table Between Loan and EMI (in Tabular Form)
|Parameter of Comparison||Loan||EMI|
|Meaning||A loan is money given to the customer by the bank for future repayment of the loan value including the interest.||EMI (Equated Monthly Instalments) is the transactional method to pay back the loan at a fixed period at a fixed rate of interest.|
|Preferred to||A loan is availed by the customer to purchase high-value items that he may not afford to purchase with his current income.||EMI is preferred by the customer to pay back the loan availed with proper financial planning in the future.|
|Tax Benefits||There are no tax benefits in getting a loan.||The repayment of loans through EMI has two components, principal amount, interest amount. In various cases of loans, tax benefits can be availed either through the principal amount or interest amount.|
|Deciding factors||The loan is decided on factors like income status, borrower’s age, value of the collateral (if required) credit status, and much more.||EMI is decided based on the loan amount, interest rate, and term duration.|
|Transaction Functionality||The loan is the transaction where the money is received.||EMI is the transaction where the money is paid back.|
What is Loan?
A loan is a money received from a financial institution for personal or business purposes which must be paid back within a stipulated period with interest. A loan can be a one-time disbursal or also multiple disbursals based on the limit set by the bank and the requirement of the customer.
Loans are often given by the banks, however, the other entities that offer loans are corporations, financial institutions, and also governments. Loans naturally allow for the growth of the money supply.
A loan is availed by an individual to purchase a high-value item which be may not be able to purchase with his regular income. A loan is availed by the businesses for its expansion or any industrial purchases.
There are different types of loans available. In simple terms, all the loans come under two categories: Secured Loans and Unsecured Loans.
Secured loans are the ones offered based on collateral whereas Unsecured loans are the ones offered by other schemes of the financial institution.
The unsecured loans are the ones people opt for. The eligibility criteria to avail unsecured loans differ from bank to bank.
Normally, it depends on the income status, credit history, age of the borrower. Indeed Unsecured loans have higher interest rates than secured loans.
What is EMI?
Equated Monthly Instalments is the transaction method to pay back the loan that is availed. While availing the loan, there are certain aspects decided upon; the rate of interest, duration to pay back the loan, loan amount.
These factors decide the EMI amount for every month. EMI is a transaction which constantly happens on said date in every month till the debt is cleared.
EMI has two components; Principal Amount, Interest Amount. As the EMI is paid every month, a certain part of the EMI clears the principal and a certain part pays the interest for the loan availed.
Naturally, the amount of money paid through EMI for clearing the debt is more than the amount availed as loan. EMI has tax benefits for the customer.
Either the principal amount or the interest amount accounts for tax benefit for the customer. It is also observed that the more the duration of the payback period, the more the amount is paid.
EMI facilitates good financial planning for every month. Some banks have different interest types; fixed and floating.
Financial experts advise choosing the fixed rate of interest as it will be clear as to how much is the money to be paid every month. Rather, floating interest leaves the customer in a bizarre state.
Main Differences Between Loan and EMI
- The main difference between the Loan and EMI is the transaction method. A loan is a monetary support offered by the bank to the customer while EMI is the payback norm to return the funds in a fixed period at a fixed interest rate.
- The loan does not offer any tax benefits while EMIs readily have tax benefits that can be filed.
- Loan to be sanctioned is decided on many factors like credit history, age of the customer, the value of the collateral, income status. EMI is decided on three factors; loan amount, rate of interest, and term duration.
- The loan is a transaction method where the funds are received from the bank while EMI is the funds paid back to the bank.
- A loan is preferred by the customer to purchase high-value items that the person cannot afford with his current income state. EMI is preferred to gain financial freedom to pay back the loan at his convenience.
Strong financial planning is required when it comes to availing of the loan. The plan must also have back up where the EMI has to be paid at any cost every month. Non-payment shall impact a lot on credit history.
The purpose of the loan must be well defined and it is advised by the financial experts to think all the means before succumbing to get the loan from the banks. EMI is a good method to pay back the loan, at times the payback amount through EMIs can easily touch two times the amount availed as loan. It all depends on lower term duration, lower the term, lower the amount paid back as interest.