Loans and bonds are common terms used in the context of managing finances. While bonds are issued by companies when they require funding, loans are extended to borrowers for their personal needs. Both are based on debt. However, unlike a loan, a bond is an investment option.
In this article, let us understand what bonds are, what loans are, and the difference between bond and loan.
What are bonds?
Fundamentally, bonds are investment options for fixed-income earners. When you purchase or invest in a bond, you lend money to the issuing institution, which pays them interest as returns. The purpose of bonds is to raise capital. Businesses, organizations, and the government often issue bonds and sell iOUs to the public.
The money collected is then used for business operations and projects. Meanwhile, those who have purchased bonds receive variable or fixed interest payments over a period of time, called a coupon.
Bonds have a fixed tenure. When the tenure ends, the investors also receive their principal amount back.
Types of bonds
Here are the main types of bonds:
- Asset-backed securities: Asset-backed securities bonds have a backing of future cash flow. One common example of asset-backed securities is MBS or mortgage-backed security.
- Corporate bonds: They are usually issued by private companies. Corporate funds are attractive because they have a high yield compared to government bonds. However, this means that the risks involved are high. Corporate bonds also have added features like deep-discount bonds, convertible bonds, and zero-coupon bonds.
- Government bonds: They are issued by the government and government subsidiaries. While they have a lower yield, they are a risk-free investment.
What are loans?
When you take a loan, you borrow a sum of money with the promise to repay it with interest. Lenders first check your creditworthiness and then decide whether to give you the money you want. If you are an eligible candidate, the lender will approve your application and offer you their loan terms.
Today, several banks and NBFCs offer loans for various purposes, such as:
- Home loans
- Personal loans
- Consumer-durable loans
- Auto loans
- Home renovation loans
- Agricultural loans or agro loans
Types of loans
- Types of loans according to the repayment options:
- Demand loans: The lender decides when and how the repayment should be made.
- Time loan: This loan is repaid at a future date along with interest.
- Installment loans: Instalment loans are the most popular type of loans. You can repay your loan in easy installments periodically. Each installment comprises an interest component and a principal component.
- Types of loans based on security:
- Secured loans: Secured loans have collaterals or securities. They can be in the form of properties, assets, stocks, or fixed deposits. These collaterals serve as backups in case the borrower fails to repay the loan.
- Unsecured loans: Unsecured loans do not require any security or collateral. They are quickly disbursed and are a great option when you need quick cash. However, the interest rates for unsecured loans can be higher than those of secured loans because there is a higher risk involved.
Loans vs bonds
|Meaning||A bond is a fixed-income instrument that generates returns through interest payments.||A loan is a debt instrument that allows you to borrow money. You will have to repay your loan to your lender with interest.|
|Rates of interest||Bonds can have fixed or variable interest rates.||Loans can have fixed or floating interest rates. The rates also depend on your creditworthiness and the type of loan. Secured loans have lower rates of interest than unsecured loans.|
|Source||You can buy and sell bonds through bond markets. The prices can vary based on various factors.||Loans are offered by banks, NBFCs, and lenders. The loan terms depend on the discretion of the issuer.|
|Tenure||Bonds are typically long-term investments||They can be long-term or short-term.|
|Terms||The bond issuing company or organization announces the terms of the bonds. They are the same for all investors who wish to purchase a bond.||The lender, bank, or NBFC decides the loan terms. Loan terms can vary according to the borrower’s eligibility and creditworthiness. If you qualify as a creditworthy borrower, your lender may offer you preferential loan terms like a higher loan amount, affordable interest rates, and a longer tenure.|
Loans vs bonds: In summary
Bonds are fixed-income instruments you can use to generate returns. If you have a low-risk capacity and want low but guaranteed returns, you can invest in government bonds. But, if your risk appetite is high, you can enjoy high returns by investing in corporate bonds.
Loans are finance products designed to help individuals and companies borrow a sum of money, which they have to pay back with interest. You can take a loan for a variety of purposes, such as financing a home, starting a business, or funding your child’s education. Opt for Tata Capital Loans at competitive interest rates for all your needs & purposes.