Many people do not understand the difference between a standard loan from a bank and a debt borrowed from an MFI. Although at first glance the principle is similar, there are some peculiarities that need to be taken into account. To avoid more questions, it is necessary to understand the difference between a loan and a loan from a bank.
What Is A Loan?
The term “loan” refers to the lending of a sum of money to a client under the conditions described in the contract and the subsequent repayment of the funds to the bank or the lending company, taking into account the interest rate. The concept of “debt” has broader boundaries, including various forms of financial relationships.
In everyday life, discrepancies in the concepts do not play a role, but in the legal space there is a fundamental difference. If there is confusion about the terms in a document, it can be annulled and declared invalid.
Types of Loans
To better understand the terms “credit” and “loan”, what the difference between them, and what is better to choose, it is necessary to understand the classification. As a standard, there are several varieties:
- Consumer credit – one of the most popular types of lending to individuals. It implies issuing money at interest for personal needs (repairs, vacations, shopping, etc.).
- Car Loan – a targeted consumer loan. Unlike the previous type, the funds can only be spent to purchase a car, which is necessarily insured.
- Mortgage: a large, targeted loan with a long repayment period. As a rule, it is provided for the purchase of housing.
Bank loans can be classified according to various criteria:
- duration of repayment;
- the method of disbursement (cash, credit cards);
- interest rate, etc.
Regardless of the type of loan, the borrower undertakes to repay the funds on time. Repayment is usually made monthly in equal installments.
What Is Debt?
Debt is the fact that one party to a financial relationship (the lender) transfers financial resources or tangible objects to another (the borrower). Unlike a loan, loans can be given by individuals against a receipt.
Most MFIs provide short-term loans (up to 30 days), which must be repaid in one payment. The interest rate, due to increased risks of the company, is significantly higher than in banks. The rate can reach 1% per day (365% per year).
Types of Debt
Microloans are divided mainly by the way they are received. The main types of microloans are:
- to a bank card;
- cash;
- E-wallet or cell phone.
Otherwise, the conditions in most companies are about the same:
- consideration of the application for 5-10 minutes;
- instant issuance or transfer of funds;
- up to 30 days.
You can also distinguish:
- offline loans, which can be obtained only in the office of the MFI;
- Online loans provided remotely.
The latter are issued without the need to visit the company’s branch. The loans are disbursed around the clock.
Advantages and Disadvantages of Loans
The main advantages of bank loans are:
- Relatively low interest, and in the case of interest-free installment loans there are no overpayments.
- The possibility of obtaining a large sum for a long period.
- Variety of conditions, which depend on the company and type of credit.
- If necessary, it is possible to repay early.
The disadvantages can include:
- Strict repayment schedule and a system of penalties in case of late payment.
- Collection of a package of documents and proof of income, if required by the bank.
- No opportunity to spend money at one’s discretion, if the credit is targeted.
- Long procedure of registration and consideration of the application, which can take several hours or days.
Most banks approve small amounts instantly, and require only a passport to apply. But large loans are given only to verified clients who meet the requirements.
Pros and Cons of Microloans
Microcredits also have many positive features:
- Instant processing and review of the application. An average of 5-10 minutes. Funds are transferred instantly.
- Sending the application online and around the clock. Receiving money on a card or e-wallet does not require a personal visit to the office.
- Minimum of documents. Most MFIs only require a passport.
- No proof of source of income required.
- Many convenient ways of repayment.
The disadvantages of instant lending are enough:
- Higher interest rates.
- Short repayment period.
- The system of penalties in case of untimely repayment.
- Low credit limit.
Some microfinance organizations provide interest-free loans to new clients, and loyalty programs are available to regular borrowers.
What Is the Difference Between Loans and Debts?
If you read the definitions presented above, you can see the main difference – a loan allows you only to borrow money, while a borrowing allows you to have cash or other property. In practice, however, there are more differences. They consist of the following:
- Parties to the contract. Only legal entities have the right to lend. Citizens and companies can issue debts.
- Interest. Borrowings can be obtained without paying extra fees. Usually such offers are given as part of the promotions. There are no interest-free loans.
- Procedure for Repayment of Obligations. There is less time for repayment of debts. They are topically paid off in a lump sum. If the borrowing is large, it is possible to pay 2 times a month. Loans are repaid monthly.
What Is More Profitable to Choose in The End?
Microloans and loans have a lot of positive and negative sides. Despite some similarities, the two types of lending have specific features. It is impossible to say unequivocally what is better, as much depends on the specifics of the particular situation and the goal pursued by the borrower.
Microcredits are better suited if a small amount is needed urgently. MFIs often conduct promotions, drawings, and contests. But taking large loans is not recommended, because of too high interest rates. Calculate so that the payment is comfortable for repayment.
Bank loans require more time and have more requirements, but there is an opportunity to get a large amount to make a major purchase. If you are lucky, you can get minimal interest or an interest-free installment plan. To summarize, we hope you found everything you were looking for in our article.