Loan vs Bond: Know the Difference

The market is flooded with debt products. Debt products are designed in various ways to meet the needs of various individuals and entities. Like individuals, large companies, such as those listed on exchanges, and government organisations, require regular funds to cover the cost of mega projects that aid in economic development directly or indirectly. The concept of bonds comes into play here. However, most people confuse regular loan products with bonds.
Read on to understand the difference between bonds vs loans.
 

What are Bonds?

Bonds are financial instruments that are issued by governments or large corporations to fund projects or businesses. They function as a loan product, with the issuer, such as a government or corporation, acting as a borrower and individuals such as retail investors, high net worth individuals (HNIs), or institutional investors acting as lenders.
 
The bond issuer pays the bondholder with interest regularly until the bond matures. The interest rate depends upon various parameters. If the issuing entity does not have strong financials, they usually offer attractive rates of interest to attract investors and persuade them to subscribe. The best aspect of this debt instrument is you can secure a loan against bonds if the time to maturity is far. 
 
Depending on the type of bond, they are available on the exchange or, in the case of a capital gain bond, directly from the issuer's website.
 

What are the Different Types of Bonds in India? 

• Government Securities Bonds

  Government securities bonds, or G-Sec, are issued by the state government or central government of India. The primary purpose of such issuance is to arrange funds for highway projects, health infrastructure improvements, or railway infrastructure strengthening. These bonds are issued for a long tenure, ranging from 5 to 40 years. 
   

• Convertible Bonds

  These are fixed-income instruments issued by major private corporations. Convertible bonds allow you to convert your holdings into a set number of shares. The bond agreement specifies the conversion process and other critical details.
   

• Callable bonds

  A callable bond allows bond issuers to withdraw their floating bonds from the market when interest rates fall. The issuer then reissues them with new terms but lower interest rates. These bonds pay higher interest than most debt instruments to compensate bondholders for potential income losses.
   

• Puttable bonds

  Puttable bonds are uncommon in India. It grants the bondholder the right to request that the issuer repurchase the instrument well before the maturity date. The repurchase price and other provisions relating to holders' power are predetermined. Such bonds are usually repurchased at face value.
   

• Zero coupon bonds

  They are deep discount bonds that do not pay interest in any year throughout the maturity period. For example, if the face value of the bond is Rs 1,000 and it is a zero-coupon bond, you can buy it for Rs 800. You will be paid the full face value upon maturity.
   

• Inflation-indexed bonds

  These bonds are typically used to hedge against inflation risk. The interest rate moves in tandem with the country's inflation rate. If inflation rises, so does the bond rate, and vice versa if deflation occurs. Inflation-indexed bonds are issued by the Reserve Bank of India (RBI).

Also Read: Top 7 Short-term Investment Plans in India
 

What are Loan Products? 

A loan is a debt product offered to individuals or corporations by financial institutions in India, such as banks or NBFCs. The loan amount, repayment period, and interest rate are all predetermined and specified in the loan agreement. The rate is calculated using the applicant's credit history, occupation, and income. Commercial loans, such as business or equipment loans, prioritise the company's profitability and debt coverage ratio while performing credit appraisal. 
 

What are the Different Types of Loan Products?

Loan products are classified into secured and unsecured.
 

1. Unsecured

The lender does not ask for collateral to approve your loan. They are ideal for meeting short-term financial needs. Unsecured loans are further subdivided into the following categories.

• Personal loans

  You may use this loan for commercial and personal purposes without explaining to the lender why you are applying for this product. The maximum repayment period is 60 months, with a maximum funding amount of Rs 5,00,000. People often seek this loan to cover medical expenses, wedding expenses, and their children's school fees.
   

• Business term loans

  This loan is only available to self-employed individuals, and the funds must be used solely for business purposes. The maximum funding accessible here is Rs 25,00,000, and you can choose a payback period ranging from 12 to 36 months. Most businesses use this loan to meet working capital needs, pay employees, and replace old equipment with new ones.
   

• Credit Cards

  They are a very common type of unsecured loan that can be found in the wallet of any earning individual. Credit cards are ideal for shopping and paying for household expenses. They do not charge interest until you default on the bill. 

Also Read: Personal Loan or Credit Card Which one would you go for
 

2. Secured loan

This type of loan carries a minimal default risk as the funds are backed by worthy assets. And due to this, the lender charges a low-interest rate on such loans. The most common examples of this kind of loan are–
 

• Mortgage loans

  The two common types of mortgage loans are house loans and loans against property (LAP). The former can be used to build a new house, purchase a flat, land, or home, or add a new floor. On the other hand, a loan secured by real estate does not impose usage restrictions. You can use them for anything. However, LAP is primarily available to established businesses against commercial assets.
   

• Two-wheeler loan

  This one is a product-specific loan where the lender hypothecates the financed bike until the loan is repaid in full. Bike loans are easily accessible to low-income groups. The resale value is crucial in determining the interest rate.
   

• Used car loan

  The growth of the used-car market and the demand for pre-owned vehicles have increased the popularity of used-car financing. The car's age, registration certificate, interior and exterior condition, and insurance claim history are all important factors in loan approval.
   

Difference Between Bonds and Loans

Parameters	Bonds	Loans
Meaning	They are issued by corporations or government entities and are used to borrow money from the general public and use the funds for project completion.	A loan is a type of debt product provided by financial institutions to individuals or businesses to meet their short or long-term monetary needs.
Tenure	Long-term, up to 40 years	The majority of loan products are available for terms ranging from 36 to 60 months. However, the repayment period for a mortgage loan can be as long as thirty years.
Source	You can buy them when they are first offered for subscription in the primary market or invest in them in the secondary market.	You can avail them only through lending institutions.
Examples	Municipal bonds, corporate bonds, RBI bonds, etc.	Personal loans, credit cards, mortgage loans, etc.
Trading	They are exchange-traded debt instruments.	They are non-tradable.

 

Conclusion

Bonds are debt instruments that lower the risk of your equity-oriented portfolio. This may be the best option if you want a consistent income, especially in retirement. A loan is a financial product designed to help people in times of financial need. You are the borrower in the loan and must pay the interest rate to the financial institution. Conversely, bonds pay you interest as you are the lender and the bond issuer is the borrower.