What is the Difference Between Loan and Advance?

The main difference between a loan and an advance lies in their purpose and repayment tenure. Here are the key differences between the two:

1. Purpose: Loans are typically used for long-term financing needs, such as purchasing a property, a vehicle, or investing in research and development. In contrast, advances are used for short-term financing needs, such as paying for inventory or covering expenses until the next payment cycle.
2. Repayment Tenure: Loans generally involve larger amounts of funds and have longer repayment tenures, often stretching for numerous years. Advances, on the other hand, involve smaller amounts of funds and have shorter repayment periods, typically not exceeding a year.
3. Interest and Risk: Loans usually have higher interest rates and can be secured or unsecured, depending on the lender's requirements. Advances are considered forms of credit and typically have lower interest rates, as they carry less risk due to their shorter repayment periods.
4. Legal Formalities: Loans often involve more legal formalities compared to advances, as they are longer-term financial commitments.

Some common types of advances include:

• Short-term loans: The full amount is disbursed to the borrower at once, and the loan tenure for repayment is typically shorter.
• Overdraft: A facility provided by the bank that allows a customer to overdraw money from their account up to a certain limit.
• Cash Credit: A facility granted by the bank that allows the customer to borrow money up to a certain limit against collateral.
• Bill Purchase: An advance facility provided by the bank against the security of bills or invoices to be paid to the borrower.

Comparative Table: Loan vs Advance

Here is a table summarizing the differences between loans and advances:

Loans are typically used for long-term financing purposes, while advances are provided by banks to cover short-term fund requirements for businesses.