Bonds are a type of debt instrument that a company or government issues to raise funds. The bond issuer promises to make regular payments to the investor through interest payouts. Furthermore, bonds have a fixed tenure, and on maturity, the bondholder receives their principal amount back. On the other hand, a loan is a debt instrument with a variable interest rate that banks and financial institutions usually offer. Also, the term of loans is agreed upon by the loan issuer and the person seeking the loan.
Bonds vs Loans
Following are the key differences between bonds and loans:
|Basis of Difference
|Bonds are a type of debt instrument. It is a method through which governments or companies raise funds. Institutions issue bonds and promise to pay regular interest payments to the investor.
|A loan is money borrowed by an individual from a financial institution. The borrower agrees to repay the borrowed capital and interest within the loan tenure.
|A large number of investors subscribe to a bond.
|A single financial institution gives a loan to the borrower.
|Short term or long term
|Bond interest rates can be set, variable, or no interest at all, as in the case of zero-coupon bonds. Furthermore, government bonds are safer investment options as the default risk is low. Thus, the yields are also lower compared to other types of corporate bonds.
|Loan interest rates are fixed or variable and depend on the base rate. In most circumstances, loan interest rates are greater than bond interest rates, and if the loan is unsecured, the interest rate will be substantially higher.
|You can buy bonds in a primary market or a secondary market.
|Banks or financial institutions sanction loans.
|Bond issuers are either government bodies or corporates. They issue bonds to raise money to meet various financial obligations.
|Individuals or firms borrow money using loans.
|You can buy and sell bonds in the secondary market. The bond prices fluctuate based on various factors.
|Loans are not tradable and are fixed with the bank that offers the loan.
|Corporate bonds, government bonds, asset-backed securities, and municipal bonds.
|Term loans, car loans, home loans, cash credit, etc.
|The entity raising funds will decide the terms of the bond. Thus bonds are rigid in terms of revisions.
|The lender of the loan decides on the terms of the loan. Typically, the borrower and lender can negotiate the terms of the loan. Thus, loans are less rigid and are open for negotiations.