Key Differences Between Bonds And Loans

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Key Differences Between Bonds And Loans

Bonds and loans are similar terminologies but differ in several factors. These terms are often used interchangeably but in most cases, this leads to factual inaccuracies. Typically, bonds are issued by companies when they require funding. Loans, on the other hand, are issued by lending institutions to help finance the borrowers’ expenses, be it business or personal. 

Although they sound similar, there is a difference between a loan and bond. It is crucial to understand how they are different from one another. Before we dive into that, let’s explore the meaning of bonds and loans separately.

What is a Bond?

Bond is an investment option for fixed-income earners. Individuals lend money to an institution that issues a bond which subsequently pays them interest as a return. Bonds are loans used by firms, corporations or government to raise capital. The money raised is then used for business operations, and is done by selling iOUs to the public. Payments for bonds comprise variable and fixed interest payments. When the tenure ends, the principal amount is returned back. However, the interest is paid overtime. The period in which the interest is paid is called the coupon.

There are various types of bonds:

  • Asset-backed Securities - Lending institutions issue asset-backed securities bonds that have a backing of future cash flow. MBS or Mortgage-Backed Security is one of the common asset-backed securities that gained the spotlight during the financial crisis that occurred in 2007-08.
  • Corporate Bond - Corporate funds are issued by corporations and have a high yield compared to government bonds. However, the risks involved are high. There are additional features for corporate bonds like deep-discount bonds, zero-coupon bonds, convertible bonds, etc.
  • Government Bond - A government bond has a lower yield and comes with a risk-free investment.
Must Read: 5 Tips to Qualify for Loan Against Securities

What are Loans?

Loans are for borrowers who receive certain money but eventually have to pay it back with interest. The catch is that a lending institution must check the borrower's creditworthiness before giving them the loan. Through this, the lender analyses and understands the borrower's eligibility to pay the loan back within the defined loan tenure.

Loans are branched out as: 

As per Repayment

  • Demand Loan - This loan repayment decision depends on the lender.
  • Time Loan - This loan is paid at a future date combined together with interest.
  • Instalment Loan - The repayment of an instalment loan occurs periodically. Depending on the terms, the repayment is made.

As per Security

  • Secured Loan - Secured loans have collaterals as backups if the loans aren’t paid on time.
  • Unsecured Loan - Unsecured loans have little or no collateral and are prone to high risks. This is why the interest rates on such loans are high.

Difference Between Loan and Bond

To understand the difference better, let’s draw a comparison table that illustrates bonds vs loans.

Key Bonds Loans

 Meaning

A bond is a fixed-income instrument representing a loan made by an investor to a borrower that could be firms or government. They pay interest annually.

A loan is a debt-instrument provided by financial institutions or banks to individuals or corporates. A borrower who receives the money, is required to pay back the loan amount along with interest.

Interest Rates

The interest rates can be either fixed or variable.

Secured loans have low-interest rates, whereas unsecured loans come with a high-interest rate. Interest loans can be fixed or floating.

Source

Bond markets are the source of buying or selling a bond.

Loans can be sanctioned by lending institutions or private lenders.

Owners

Private professionals go for bonds. It is an investment for them against corporate companies.

Borrowers are private individuals who opt for loans from lending institutions.

Example

Capital bonds.

Personal loans.

Tenure

Bond tenure is usually long-term.

Loan tenure can be either short-term or long-term depending on the loan taken.

Terms

Companies or the government raising funds decide the terms of the bonds.

Lending institutions decide the terms.

Conclusion

As an individual, perspective matters. A bond is termed an investment instrument that is a low-risk investment but beneficial if maintained in the long run. On the contrary, an individual opts for a loan when they require financial assistance but must pay the lending institution with an additional interest rate.

There are plenty of lending institutions that can help you avail loans. If you are interested in taking up a loan in the near future, check out Fullerton India’s personal loan options with interest rates of 11.99%* per annum. You can even comprehend how much EMI you need to pay through our online personal loan EMI calculator on our website.

*Terms and Conditions apply. Loans are disbursed at the discretion of Fullerton India.