What is the Difference Between Loan and Debt?
🆚 Go to Comparative Table 🆚The terms 'loan' and 'debt' are often used interchangeably, but there are slight differences between the two. Here is a comparison of the two terms:
- Loan: A loan is a specific amount of money borrowed from another party, typically a bank, NBFC, or other lenders. Loans are typically repaid in installments, known as Equated Monthly Installments (EMIs), which include both the principal and interest amounts. Loans can be availed by both individuals and businesses for various purposes, such as education, health, vacations, or business ventures.
- Debt: Debt refers to the total amount of loans one has outstanding. It can involve real property, money, services, or other considerations. In corporate finance, debt is more narrowly defined as money raised through the issuance of bonds, stocks, and debentures. Debt is usually repaid with interest, either in regular installments or as a lump sum.
In summary, a loan is a specific amount borrowed from a lender and is a form of debt, while debt is the total amount of loans one has outstanding and can encompass various types of borrowings.
Comparative Table: Loan vs Debt
The difference between a loan and debt can be summarized in the following table:
| Feature | Loan | Debt |
|---|---|---|
| Definition | A loan is a sum of money borrowed from a lender, which must be repaid with interest over a specified period of time. | Debt refers to the obligation to repay borrowed money or the amount still owed on a loan. |
| Purpose | Loans are typically used to cover expenses or invest in the future, such as education, home ownership, or business growth. | Debt represents the outstanding balance on a loan or the amount that remains to be paid. |
| Repayment | Loans have a repayment plan, which includes regular installments (principal and interest) over a specified period of time. | Debt can be repaid through various methods, such as interest-only payments, principal and interest payments, or balloon payments. |
| Interest | Loans usually come with interest charges, which represent the cost of borrowing money. | Debt may accrue interest over time, increasing the total amount owed. |
| Flexibility | Loans can be flexible, offering different repayment terms, interest rates, and loan amounts depending on the type of loan and the borrower's creditworthiness. | Debt management options can be available to help borrowers manage their debt more effectively, such as refinancing, consolidating, or modifying loan terms. |
In summary, a loan is a borrowed sum of money that must be repaid with interest over time, while debt represents the obligation to repay borrowed money or the outstanding balance on a loan. Loans are typically used for various purposes and have repayment plans with interest charges, while debt management options can help borrowers manage their debt more effectively.
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