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Difference Between Loans and Advances in Banking

When we fall in a financial problem or when we want to fund our business we directly think in taking a loan or an advance but some people may mix between them but the two are totally different. Loans and advances difference are many and we are going to discuss these differences in this article.

The definition of Loans

Loans are the lending of money by one or more individuals like your mom or one of your friends, organizations such as banking, or other entities to other individuals, organizations. the borrower incurs a debt and is usually liable to pay interest on that debt until it is repaid.

The definition of Advance

Advances are a short term financial provided by the banks to the companies. It is a credit facility which should be repaid in one year as per the terms A business may also apply for an advance from a banking institution upon which the amount is paid within a year.

Difference Between Loans and Advances in Banking

-Amount of money

Loans usually include a huge amount of money but unlike advance that includes a little number of money advances are used to fund recurrent expenditure unlike loans are used to fund a bigger project.

-Payment Duration 

Loans take a larger period to be paid as compared to advances, and the period depends on the bank’s demands because loans are bigger than the advance, for example, a loan might be a million dollar but an advance is a thousand dollar. A loan may even take more than ten years before it can be fully settled.


-Securities 

When you apply for a loan you will be asked for securities such as your house contract, or your car’s licence, so that the bank garnitures that you will pay back the loan, but in advance, you won’t be asked for securities because your salary or the work being done already covers the advance.

-Interests

Bank loans provide you with a huge amount of money so the interest is very high which is used to cover for the time value of money and the risk associated in giving such huge amounts of money, but advances won’t need a high rate of interest because they are paid back in a short time. 

-Formality 

Loans are very formal, and they include lengthy bureaucratic procedures before one can access the amounts, but in advance, it is not the same for advances, and only a few bureaucracies are involved before one gets the money, so simply loans are more formal than advance because it includes a bigger amount of money.