We link both loans and debts to money. Obviously, both of them are common to everyone and they are liabilities you need to pay off. This is because you can’t second-guess paying off a personal loan, consolidation loan, quick loan or mortgage loan you got. However, most people normally use loans and debts synchronously, but they have a slightly unique perspective. And that with a lot more you’ll see in the rest of this article.
What is a loan?
A loan is the money you get from a financial institution, which they expect you to repay with timely interest.
However, most times the exact amount of loan which you can get depends on your job type. Besides that, your income, tax information, debt in the market and credits (credit score/ history) are other important factors.
Loans are typically safe and secured. Moreover, some of them require collateral like; home, car, vehicle, and others. Because of this, if you cannot repay the loan, they will possess your asset.
Types of loans
There are different loans for borrowers across various financial institutions. They are:
What are the advantages of loans?
Loans come with many advantages for borrowers. Some advantages of loans are:
- Low-interest rates
Some banks offer manageable interests which are more comfortable for borrowers to pay.
- Tax benefit
The interest you pay when you use your loan for business is a tax deductible expenditure. Besides that, you do not need to share your profit with your lender.
What are the disadvantages of loans?
Just as loans come with advantages, they also have their shortcomings too.
The disadvantages of loans are:
- They sometimes require collateral
Financial institutions sometimes ignore borrowers’ credit score (how good it may be), and ask for some collateral. However, this is how they protect themselves should you cannot repay the sum of money they lend you.
- It could complicate application
Most times, except for online loan applications, you will need a lot of physical paperwork in order to apply. However, sometimes they could require you to visit the financial institution in person in order to complete some loan agreements. And this could go up to months to process your request and approve it depending on how fast the lenders are.
What is a debt?
Debt is the amount of money you borrow from a particular individual, nonprofit organization, or financial institution.
In this type of arrangement, you can return the principal amount of loan any time you wish. And the lender could require little or no interest from you before giving you the money.
Types of debts
There are different debts, and they are:
- Personal debt
- Medical debt
- Credit card debt
- Corporate debt
- Consumer debt and others.
What are the advantages of debt?
There are some advantages debts have. They are:
- You do not need qualification
Most financial institutions usually require you to belong to a particular social status. Or even have a certain level of tax information before you can qualify for a loan. But that’s not the case for debts.
- It is usually on a long-term basis
With Debts you can have a long-term relationship with your lender. This could cause a scenario whereby you can share a bit of your profit with your lender. Thereafter, you can still borrow money again from your lender to expand your business and also repeat the process over again.
What are the disadvantages of debts?
Debts also come with some disadvantages. The following are some of them:
- It could affect your credit rating
Debt typically reduces your credit score. And this places a terrible impression on your credit history, especially if you need additional funds from another lender. Therefore, having a debt can flag your credit score and make lenders reject your request for additional funds.
- It could be unsafe sometimes
Sometimes debt lenders can be frauds, especially loan sharks. And you can unknowingly involve yourself in a debt trap. Thereby leading you to harassment, threats, and loss of properties.
The difference between loans and debts
With the points discussed above, you could easily spot the difference between loans and debts. However, let’s see the key difference between them.
The following are the key differences between loans and debts:
- Loans usually require collateral, whereas debts do not.
- All the loans you get are debts, but all debts you owe are not loans.
- The money you borrow from a financial institution is a loan, whereas the one you borrow from a person or debenture is a debt.
With this article, it is cool to assume that the difference between loans and debts has been addressed. They usually document loans very well, possibly because it’s more official than some debt. Whereas debts do not require serious documentation at all times. However, do not abuse the privilege that comes with debts in that regard. Always stick to the agreement you have with your lender. This is because once you want to play on the intelligence of the lender. Then your lender could deny you such privilege you’ve been enjoying.