Loans vs. Advances

5 Key Differences Between Loans and Advances

May 26, 2023 • 1905 views

Understanding the difference between loans and advances is important for making the right financial decision during a financial crunch. They serve different financial purposes. Loans help meet both short and long-term financial requirements; advances help meet all short-period financial requirements. Which one to choose? Read on to clear the blurred lines between the two!

What is a Loan?

A loan is a financial instrument that involves borrowing a specific amount from a lender with an agreement to repay it over a defined period. Key features of loans include:

  • Loans are typically short-term and long-term financial arrangements.
  • They involve an application and approval process based on creditworthiness and other factors such as age, income, work experience, etc.
  • Interest is charged on the loan amount, which is added to the repayment amount. 
  • While applying for a secured loan, you must provide collateral such as property or any other asset. Whereas, for unsecured loans, you don’t have to provide any collateral security.

What Are the Types of Loans?

There are mainly two types of loans offered by lending institutions. These loans cater to different financial requirements of individuals. Below are the two types of loans:

1. Secured Loans: You can avail of this type of loan by pledging collateral. It is used as a security by the lender if the borrower fails to repay the loan. Home loans and gold loans are some examples of secured loans.

2. Unsecured Loans: You can avail unsecured loans without any collateral. The interest rates for these loans are higher. A Personal Loan, Business Loan, and Educational Loan are some examples of unsecured loans.

Also Read: A Detailed Guide to Secured Loans For Every Borrower

What is an Advance?

An advance is a fund an organisation provides to its employees or customers before it is due or earned. Key features of advances include:

  • Advances are generally short-term in nature and intended to fulfil immediate financial needs.
  • They are often given for specific purposes, such as travel expenses or business-related costs.
  • Advances are typically deducted from future earnings or reimbursements.
  • Unlike loans, advances do not typically involve an interest component.

What are the Types of Advances?

Below are different types of advances an individual can avail:

1. Short-term Loans: When individual receive advance amount at once, it is considered as short-term loans.

2. Overdraft: The bank permits borrowers to withdraw more money than they have in their account, up to an authorised limit.

3. Bill Purchase: Borrowers must pledge bills to receive the advance.

4. Cash Credit: The bank enables borrowers to access advance funds without maintaining any credit balance.

5 Key Differences Between Loans and Advances

Below are the key five differences between loans and advances:

Parameters

Loans

Advances

Nature

Loans are considered as debts.

Advances are considered types of credit facilities.

Purpose

Helps to meet long-term financing needs like purchasing a vehicle, educational expenses, etc.

Helps to meet short-term financing needs like inventory payments, until the next payment cycle, etc.

Interest Rate

Interest is charged on a loan based on its type and the sanctioned amount, with most loans carrying a high-interest rate.

Financial institutions charge significantly lower interest on advances compared to loans because the repayment tenure does not exceed 12 months.

Repayment Periods

Usually, they have fixed repayment periods.

Most do not have a specific repayment schedule.

Processing Time

Longer processing time.

Faster processing time.

Loan Amount

Higher than advances.

Lower compared to loans. 

 

Before applying for a loan, it is important to check your CIBIL score. Your CIBIL score helps in understanding your creditworthiness.

How to Check Free Credit Score Before Availing a Loan?

Checking your CIBIL score online for free is easy and quick with just three simple steps. Follow the below-mentioned steps to get your credit score:

  • Step 1: Click on ‘Get your CIBIL Score’.
  • Step 2: Provide the necessary information like your name, date of birth, email ID, PAN number, and more.
  • Step 3: Double-check the details to prevent errors, then click ‘Submit’.

After clicking the submit button, you will get your CIBIL score quickly, along with your CIBIL report.

Also Read: Know the Different Types Of Loans Available In India

How to Apply for Loans Online?

Follow the simple steps mentioned below:

  • Step 1: Select the ‘Apply Now’ button present in the right-hand corner.
  • Step 2: Fill out the application form by providing details like your full name, monthly income, PAN card number, etc.
  • Step 3: Upload the required documents like your bank statement, PAN card details, etc., and hit the ‘Submit’ button. 

Upon successful verification, the loan amount will instantly be disbursed into your bank account. 

To Conclude

Understanding the key differences between loans and advances is crucial for businesses and individuals seeking financial assistance. They have significant differences in terms of interest rates, repayment terms, processing time, etc. By getting a clear distinction between loans and advances, you can make a well-informed choice based on your financial situation.

Frequently Asked Questions

  • Is credit score important to avail loans or advances?

Yes, a credit score is important to avail loans or advances. Lenders assess this score to understand your repayment ability.

  • What are the advantages of advances?

Here are some advantages of advances:

  1. Meets unexpected cash demands.
  2. Does not require extensive documentation.
  3. Provides greater control over cash flow management.
  4. Have a flexible repayment tenure.
  • What is the purpose of loan and advance?

The purpose of loans and advances is to provide financial assistance to individuals or businesses for various reasons. Loans are often used for larger investments or purchases, while advances cater to short-term needs. Both serve the purpose of providing access to funds that can be repaid over time with interest.

  • What is a loan or advance payment system in a company?

A loan or advance payment system in a company refers to the process and policies established by the company for providing loans or advances to its employees. This system outlines the terms, conditions, and repayment mechanisms for the loans or advances granted by the company.

Disclaimer

We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Loan disbursal is at the sole discretion of Poonawalla Fincorp.
*Terms and Conditions apply

poonawalla fincorp team

Poonawalla Fincorp Team

Our team of expert writers and editors are passionate about providing authentic and valuable information on finance. Our aim is to simplify financial and finance-related concepts. We strive to help our readers become more aware and empowered to make informed financial decisions.

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