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Differences Between Loans and Bonds
Loans and bonds are critical financial functions within financing and debt securities. However, there are extensive differences in the meaning, structure, utilisation, and access when it comes to bonds vs loans. While loans, like a personal loan or gold loan, are the only option an individual may have when they need to borrow money, bonds and loans are both available for businesses or businesspeople to choose from. On the other hand, bonds may be a viable option for individuals who are looking for investment opportunities.
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All in all, whether an individual, businessperson, or a business, having an understanding of the differences between bonds vs loans is crucial for making an informed decision when the time comes.
What Is a Bond?
Bonds are debt instruments that are issued by a company or government agency and sold to investors in the financial market to raise capital. Bonds typically have a long duration, which can go up to 40 years, depending on the issuing entity. The buyers are paid regular interest until maturity, which is when the issuing company is to pay the investors in full.
When you buy a bond, you are essentially lending money to the issuer in return for regular interest payments. Bonds can also be traded in the financial market, which means that an investor does not have to keep the bonds until maturity.
What Makes Bonds a Good Choice for Companies:
- Interest payable may be lower than on debt instruments like loans.
- Capital can be raised without giving up equity.
- Companies with a good reputation can raise capital quickly after issuing bonds.
- With the availability of multiple types of bonds, issuing companies can enjoy a lot of flexibility.
What Is a Loan?
A loan is a direct agreement between a borrower and a lender, where the lender lends the capital and the borrower agrees to repay the amount borrowed with interest over a decided period of time. A loan can be availed by an individual or a business for a variety of reasons. Certain loans, like a home loan, student loan, etc., are specifically for individuals and certain loans, like a term loan, equipment financing, startup loan, etc., are specifically for businesses. There are also other types of loans, like a personal loan, a loan against property, a gold loan, etc., which can be availed by individuals as well as business owners.
What Makes Bonds a Good Choice for Companies:
- Simple eligibility criteria, which are generally related to a company’s financial standing, creditworthiness, and age. The CIBIL score is also a key criterion.
- In some cases, lenders may offer generous sanctions without restrictions on end usage.
- Interest rates on secured loans are competitive and more cost-efficient.
- Quick disbursals ensure easy access to capital, even in case of emergencies.
Understanding Bonds Vs Loans
Basis of Difference | Bonds | Loans |
Meaning | Bonds are issued by companies to investors. Upon purchase, investors agree to lend money to the company for a set tenure. The company can agree to pay interest and must repay the full value of the bond at maturity. | Loans are a credit instrument that companies or individuals can avail to access funds. Loans are offered by financial institutions and have set sanction limits, interest rates, and other associated costs. Under some types of loans, the sanction received may also have restrictions on the end usage of the funds availed. |
Tenure | Bonds are long-term, with durations going up to 40 years, depending on the issuing entity. | Loans can be short-term as well as long-term, depending on the credit instrument chosen and the policies of the lending institution. |
Interest Rate | Interest rates for bonds are fixed. | Interest rates for loans can be fixed or variable. |
Source | Bonds are issued by companies or government agencies. | Loans are provided by financial institutions like banks and NBFCs. |
Terms | The bond terms are decided by the bond-issuing entity. | The loan terms are decided by the financial institution that is providing the loan. |
Trading Possibility | Bonds can be bought and sold in the secondary financial market at varying prices. | Loans cannot be traded, and borrowers are bound to the lending institution by contract. However, loans can be refinanced and shifted to a new lending institution if certain conditions are met. |
Suggested Read:Top 5 Different types of Short Term Loans in India
How to Choose between Bonds and Loans?
Credit Rating
Just like the CIBIL score is a key eligibility criterion for individuals availing loans, a company must have a high credit rating to issue bonds. If a company has a low credit rating, collateral must be offered to make the bond safer for investors. In this case, loans are easier to get, as banks also take the business potential, income, and growth plans into consideration.
Speed of Fund Access
Getting a loan is often quicker than issuing bonds, as bonds need extra steps, like government approvals and legal checks. So, a loan may be the better option if you are in urgent need of funds.
Predictability
The repayment terms and interest rates remain the same in case of bonds and loans with fixed interest rates, which makes budgeting for the future easier. However, if you opt for loans with variable interest rates, the repayment amount will change if the rate changes, which makes it less predictable.
Flexibility
Once a bond is issued, the terms cannot be changed. Loans offer a lot more flexibility, as the interest rates, repayment terms, or refinancing options can often be changed.
Suggested Read: A Complete Guide About Gold Loan Process and Eligibility
Muthoot Finance, India’s largest gold loan NBFC, has been empowering millions with accessible financial solutions for over 800 years through the Muthoot Group. Muthoot Finance ensures trust, transparency, and customer-centric services, offering a range of financial solutions that can help individuals and businesses achieve their financial goals.
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