Loans and advances are generally used for the same purpose; to obtain some extra funding during times of financial difficulties. One of the primary differences between loans and advances is the formality involved when acquiring such money.
A loan is when one party (called the lender, which is usually a bank or financial institution) agrees to give another party (called the borrower) a sum of money that is to be paid back after a certain period of time. Loan example: Auto loan, Personal loan, Education loan, Home loan etc. Advances example: Short-term loan, Overdraft facility, Cash credit, Bill purchased etc.
Major differences between loans and advances are:
- Money lent by an entity to another entity for specific purposes is known as Loan. Money provided by the bank to entities for fulfilling their short-term requirements is known as Advances.
- An advance is a credit facility that is provided to the individual/corporation by the financial institution, bank, employer, friend, relative etc.
- A loan is treated as a debt where a lender such as a bank will formally lend funds to a borrower, whereas an advance is a credit facility, which is usually less formal than a loan.
- A loan requires an asset to be pledged as collateral, whereas this is not the case for advances.
Loans are for a longer period of time and need to be repaid with interest while advances are taken for shorter time periods, and interest is not charged on the amount borrowed. A loan is a kind of debt while Advances are credit facility granted to customers by banks. They are generally used for the same purpose; to obtain some extra funding during times of financial difficulties.