What Are the Differences Between Loans and Advances
Loans and advances are two types of financial products commonly used by individuals and businesses to access the funds they need to meet various financial goals. Although both loans and advances serve a similar purpose, there are significant differences between the two that are important to understand before deciding which one to choose.
In this blog, we will explore seven major differences between loans and advances. We will also discuss the various types of advances and loans available, as well as the eligibility criteria for Personal Loans and short-term loans from Hero FinCorp. Let’s begin with understanding the meaning of loans and advances.
What are Loans and Advances?
Loans are funds offered by various financial institutions to individuals and businesses for multiple purposes. Loans offer a lump sum amount to the borrower, who agrees to pay back the money with interest over a certain period.
Advances are a type of credit facility that NBFCs like us offer to their customers. Advances are similar to loans, but they are short-term in nature.
Read More: What Hidden Charges Should You Expect with Personal Loans
Types of Loans and Advances
Understanding the various types of loans and advances available can help you make informed financial decisions. Let's explore the primary classifications and their key characteristics.
Types of Loans
Loans can be broadly classified into two categories: Unsecured and Secured Loans. Let’s understand more about them.
- Secured Loans: These loans require you to provide an asset, such as property, gold, or a vehicle, as collateral. In case of default, the lender can seize the collateral to recover the outstanding amount. Due to the reduced risk for lenders, secured loans often come with lower interest rates. Common examples include home loans, car loans, and gold loans.
- Unsecured Loans: Unlike secured loans, unsecured loans do not require collateral. Instead, they are granted based on the borrower’s creditworthiness and ability to repay. Because these loans pose a higher risk to lenders, they usually come with higher interest rates. Examples include personal loan, education loans, and wedding loans.
Types of Advances
Advances are short-term funds provided by financial institutions to meet immediate financial needs. Here are some common types of advances:
- Overdraft: An overdraft allows you to withdraw more money from your bank account than your current balance. It acts as a short-term loan, providing flexibility in managing cash flow without requiring additional approvals for each transaction.
- Cash Credit: This facility lets you borrow money up to a certain limit based on the value of the asset pledged. Cash credit is useful for businesses needing regular working capital, allowing them to draw and repay funds as needed, up to the sanctioned limit.
- Payday Loans: These are short-term loans offered to salaried individuals, typically to cover immediate expenses until the next paycheck. The eligibility criterion is straightforward—you must be employed. Payday loans are convenient for emergencies but often come with high interest rates due to the short repayment period.
- Bill Purchase: Commonly used by businesses, bill purchase involves selling invoices or bills to the bank for immediate cash. This helps businesses manage cash flow by converting receivables into liquid funds, which can be used to cover operational expenses or other immediate needs.
Seven Major Differences Between Loans and Advances
Understanding the differences between loans and advances is crucial for effective financial management. Here are seven major distinctions that highlight their unique characteristics and purposes:
Differences Between Loans and Advances
Here are the key seven differences between loans and advances:
| Aspect | Loans | Advances |
|---|---|---|
| Purpose | Long-term financing needs (e.g., property, vehicle) | Short-term financing needs (e.g., inventory, expenses between cycles) |
| Types | Mortgage, vehicle, personal | Secured, unsecured, demand, term, revolving |
| Interest Rates | Lower (due to fixed repayment and lower risk) | Higher (due to short-term, often unsecured nature and higher risk) |
| Repayment Terms | Fixed schedule over years | Flexible, often due any time or with specific terms |
| Risk | Lower risk for lender due to fixed schedule | Higher risk due to short-term nature and potential lack of collateral |
| Borrower Eligibility | Requires good credit score, steady income | Easier to qualify due to shorter terms and higher interest rates |
| Processing Time | Longer processing time | Generally quicker due to less stringent requirements |
Read More: Understanding Loan Repayment in Herofincorp
Similarities Between Loans and Advances
Loans and advances are financial products that help you during tough times. While they differ in nature and features, they also have similarities:
- Banks and NBFCs offer both loans and advances.
- Individuals and businesses can access both.
- Both may require collateral or be unsecured.
- Repayment terms are agreed upon between the borrower and lender for both.
- Failing to repay can affect credit ratings.
- Timely repayments improve credit scores for both.
Loan vs Advance: Which One Is Better?
The choice between a loan and an advance depends on your specific financial needs and the terms offered by the lender. Here’s a brief comparison to help you decide:
Loan:
- Purpose: Typically used for large expenses like buying a house, car, or funding a business.
- Repayment: Usually repaid in installments over a fixed period with interest.
- Interest: Interest rates can vary based on the type of loan and market conditions.
- Documentation: Requires detailed documentation and may involve collateral.
Advance:
- Purpose: Generally used for short-term cash flow needs or emergencies.
- Repayment: Repaid from future earnings or a specific transaction (like salary advances).
- Interest: Sometimes interest-free or with minimal charges, depending on the advance type.
- Documentation: Minimal documentation often required, especially for salary or cash advances.
Which is better?
- Loan is better for substantial financial needs requiring structured repayment.
- Advance is suitable for short-term and immediate cash requirements without long-term commitment.
How To Apply for a Personal Loan Online from Hero FinCorp?
Applying for a Personal Loan online with Hero FinCorp is simple:
- Visit the Hero FinCorp website or download the Personal Loan app.
- Fill in the required details accurately.
- Upload necessary documents securely.
- Receive approval notification within minutes.
- Accept the loan terms to get disbursal into your account.
Conclusion
Loans and advances are two types of financial products that serve different purposes and have significant differences in terms of interest rates, repayment terms, collateral requirements, risk, borrower eligibility, and processing time. Loans are used for long-term financing needs, while advances may be used for short-term financing needs.
Understanding the key differences between loans and advances and their various types is essential to make an informed decision on which one to choose based on your financial needs and circumstances.
If you are looking for a loan, consider applying through our website or mobile app. We have a hassle-free loan approval process with very few requirements. For example - if you are considering a Personal Loan from Hero FinCorp, just check your Personal Loan eligibility on our website and apply instantly.
Frequently Asked Questions
1. Is loans and advances an asset or liability?
Loans and advances are assets on the balance sheet of a lender as they represent money lent out which will be repaid with interest.
2. Is loans and advances credit or debit?
Loans and advances are recorded as a debit in the lender's books as they increase the amount owed to the entity.
3. Are loans and advances operating assets?
Loans and advances can be classified as operating assets if they are part of the core operations and expected to be converted into cash within a year.
4. Is loans and advances a financial asset?
Yes, loans and advances are classified as financial assets because they represent an expected future economic benefit in the form of cash flow.
5. What are the features of loans and advances?
Loans and advances typically involve principal amounts, interest rates, repayment terms, and sometimes collateral to secure repayment, ensuring financial returns for lenders.
