Loans and bonds are common terms that most people are aware of, but the differences between them can often be confusing. This is because bonds and loans are similar in certain aspects, hence discussing them in detail becomes necessary. First, let’s look at what these terms exactly mean:
- Bonds are a type of debt instrument that allows governments and companies to raise capital through the sales of IOUs – with annual interest payments.
- A loan is also a debt instrument usually provided by banks and NBFCs with a fixed or variable rate of interest.
Both are methods of borrowing that provide financial assistance and benefits to customers. They effectively remove obstacles that prevent individuals and entities from achieving their goals – be it immediate or long term. Let’s take a brief look at loans vs. bonds in the following sections:
Similarities between bonds and loans
As mentioned earlier, both allow companies and governments to borrow money. Annual interest rates will be levied on firms/governments during the payment process.
The authority for selling bonds rests with governments and companies. On the other hand, loans or personal loan can be acquired by consumers and firms seeking financial assistance.
Regarding bonds, you can expect a fixed interest rate across a pre-determined period. But, in case of loans, the interest rates could be either fixed or variable – with changing base rates.
The platform for selling bonds is called bond market. They can be sold to financial/public institutions. Loans on the other hand, are provided mostly by banks and Non-Banking Financial Companies (NBFCs).
Value of bonds can fluctuate and are often bought and sold on bond market. Conversely, loans are usually fixed with the original bank or NBFC.
Also Read: What is a pre-approved loan?
Bonds: 3 years Capital Gain Bonds (54EC Bonds)
Loans: Variable bank loan
Government bonds are generally considered to be safe and don’t yield much returns. Unsecured bank loans normally come with higher interest rates thereby increasing the risk factor.
Firms will sell bonds at a fixed price. The purchaser will promise to pay back the bond in maybe 10, 20 or 30 years – depending on the agreement between the buyer and the seller. Meanwhile, the government/company will pay the interest on the bond. The buyer will repay the firm and in return get interest payments for the duration of the bond.
The most important distinction between a loan and a bond is that the former is highly tradable. Purchasing a bond would generally imply a market which will facilitate the trading of bonds. This means you will be allowed to sell bonds before the maximum period of 30 years. In reality, people purchase bonds when they endeavour to widen their investment portfolio.
Loans are agreements between banks/financial institutions and customers. They cannot be traded and the banks/NBFC are obliged to see out the loan term.
In the context of government bonds, customers can normally expect low interest rates. Most government bonds across democratic countries are low-risk and reliable; the same cannot be said for unstable economies or countries under civil unrest. Private loans on unsecured debt generally carry higher rates of interest. Corporate bonds lie somewhere in between and largely depend on the reputation of the firm.
Bonds need to be repaid in full at the end of the 10, 20 or 30 years’ period. Loan payments consist of both the principal and interest amount with the repayment period being determined in the agreement.
It would be safe to say that both bonds and loans are forms of investments that are aimed at providing tangible benefits to clients. If you are looking to apply for a Bajaj Finserv Personal loan, check out the various loan offerings from Finserv Markets, today! With us, applying for a loan is easy, quick, convenient and completely hassle-free. What’s more? Your loan application can be approved within just 3 minutes and the amount will be credited directly to your bank account in 24 hours!
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