What is the difference between loan and debt?

In general terms loans and debts are synonyms for liabilities. When you look at a balance sheet of a company, at the left side of the balance sheet (liability side) below the heads like share capital, reserves, etc. you may find a head ‘loans and debts’ where the company shows the money raised by it by way of loans, debentures, bonds, etc. Hence, it is clear that loans and debt taken together are considered as a liability of the company which has to be repaid by the company at a future date. Basically, there is no major difference between loan and debt, all loans are part of a large debt. The money borrowed by an entity requires to be paid off in both cases. However, they are distinguished on the ground of the nature of liability, tenure and repayment system, etc.

When an individual or a company borrows money from a money lender/bank/financial institution to meet personal or business requirements, it is called a loan. However, in the cases of companies, they may borrow money for expanding their capital needs to purchase plants and machinery, etc. The companies have choices that they may either go for loans from banks and financial institutions or issue bonds, debentures or even issue equity shares to the general public. The money borrowed through the issuance of bonds and debentures to the public is considered as debt. In simple words, money borrowed from a lender is a loan and the money raised through bonds, debentures, etc. is the debt. Another major difference is that the money borrowed through loans is normally required to be repaid in installments along with the interest charged whereas, in the cases of bonds and debentures, the company pays only interest at regular intervals and only on maturity of the debt instruments it will repay the principal amount.

Conclusion:A loan is money one borrows from banks and financial institutions. A loan is more structured in terms of payment, and the principal amount is paid back to the borrower in installments over a period of time, whereas, debt is the money that the company raises through the issuance of bonds and debentures. Governments, companies, trusts, or corporations can issue bonds to fund their business. In this case, from whom money is borrowed is known as the investor. The investor will receive interest payments regularly until the bond or debenture matures. Also, upon maturity, the investor gets back the entire principal amount in a lump sum.

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