What is Loan?
A loan is a debt instrument that provides a specific sum of money from one party to another, with a set of terms and conditions. These terms and conditions include the interest rate, which may or may not be fixed, and the repayment period.
A loan can be secured or unsecured. In a secured loan, the borrower provides an asset as collateral to the lender. For an unsecured loan, the lender offers no collateral to the borrower.
Banks, finance companies, credit unions, payment processing companies, and online lenders offer loans. However, each loan has its unique terms and requirements. Knowing the details about a loan can help you decide if a loan is right for you.
There are times when borrowing a loan is in your best interest. For example, a loan could be beneficial if you purchase a new home. But before you look for a loan, it’s essential to consider all options.
What is Debt?
Debt is the money or anything else you owe another person or company. Debt can be credit card debt, car loans, mortgages, student loans, lines of credit, personal loans, overdraft accounts, or something else.
One of the scariest things about debt is the idea that you can be trapped in it. However, there are ways to get out of debt. But it is better to avoid entering into unnecessary debt in the first place.
Debt collection agencies are companies hired by banks and businesses to collect overdue payments. Their job is to invoice or sue debtors for due payments and then take legal action if the debtor does not pay.
Bad debt is money owed to a company, business, or individual and looks like it shall never be paid. Debt is a tricky thing. Many consumers have accumulated more than they can ever hope to repay. The increasing cost of living and the need to pay off those credit cards on which one has accumulated all that debt, leaves them with no option but to repay only what they can.
The best way to avoid debt accumulation is to always repay one debt before getting another if you have to get another. On the other hand, having horrible debt history is not a good thing either. It can hinder you from getting a badly needed loan in the future.
Difference Between Loan and Debt
A loan is a debt-based arrangement where the borrower receives money, goods, or services in return for paying back a stated amount over a specified time. Also known as credit, loans are issued by lenders, such as banks, to credit-worthy borrowers.
Debt is money or anything else owed to an individual, business, or government. Some debts do not have specified repayment periods or any other repayment terms. Lending, in this case, depends on the trust the lender has in the prospective borrower.
Comparison Between Loan and Debt
| Parameter of Comparison | Loan | Debt |
| Duration | Usually has longer repayment periods. | Its duration can be as short as one day or less, or as long as many years. |
| Interest | A loan is always paid with interest. | Not all debts attract interest, as not all of them come from financial institutions. |
| Category | It is a subset of debt. | It is a wider term that covers all money and other things owed to someone else or to a financial institution. |
| How acquired | Money borrowed. | Money or something else that is owed. |
| Finance | Capital raised by issuing bonds and shares to the public. |