Bonds vs Loans: What’s the Difference?

Saving money is very important, but it is only a part of the story. Smart savers start by investing money in the right places. However, investing in the financial markets comes with a lot of risks and confusion. So many people have started diversifying their investment portfolios, and we get acquainted with new jargon each day. One of the many jargons of this world is bonds. Bonds are financial instruments that are often confused with loans. But what is the difference between bonds and loans? Simply put, bonds are like lending money to someone who promises to pay you back with interest. It’s a safe way to grow your money. Loans are like borrowing money from someone with a promise to pay them back with interest. So, then what is the difference between a bond and a loan? 

In this blog, we will enlighten you more about bonds and loan differences.

What are Bonds?

Commonly referred to as fixed-income securities, bonds are one of the three major assets that investors are familiar with, along with stocks and cash equivalents.  When an individual purchases a bond, they lend money to the issuer of the bond (mostly the government or a corporation). 

The purpose of bonds is to raise capital. Businesses, organisations, and the government often collect money through these bonds, which are then used for business operations and projects. Bonds have a fixed tenure during which a fixed or variable interest is paid to the investors, and after the tenure is completed, the investors receive their principal amount back.

What are Loans?

A loan is a form of debt that is given to individuals/ companies. A minimum or maximum loan tenure is decided for the repayment of the debt money or the loan amount. The repayment includes the interest amount as well as the principal amount, which is made in regular monthly installments.

Key Differences between Bonds and  Loans

Bonds vs Loans is often a topic of curiosity. But understanding the difference between bonds and loans when you are in need of capital is important. While bonds and loans may seem similar at first, let us clearly elaborate on the differences.

Feature	Bonds	Loans
Definition	Bonds are a debt instrument wherein the company issuing the bond must pay interest on the principal amount to the purchaser of the bond.	A loan is the sum of money borrowed from a lender or a lending institution and then repaid in installments at a specific rate of interest over a pre-decided tenure.
Sources	Bonds can be sold or bought from a third-party broker or directly from the bond market.	Loans can be availed from banks, NBFCs, or other private lenders.
Tenure	Bonds can be sold anytime before the maximum period of 30 years.	Loans cannot be sold and will have to be repaid within the decided repayment tenure.
Terms authority	The government or the bond-issuing company decides the terms of the bonds.	Loan terms can vary according to the borrower’s eligibility and creditworthiness. A lender, bank, or NBFC decides the loan amount, interest rate, and tenure.
Interest Rates	Bonds usually come with fixed interest rates. Therefore, the interest rate offered is quite low.	Interest rates on loans can be fixed or variable, depending on collateral (if any) or the credibility of the borrower.
Who is it best suited for?	Bonds are good for any individual who can lend money as an investment to the government or large companies looking to raise funds	Loans are availed by individuals generally for financial assistance at times or need from banks or NBFCs
Risk Involved	Bonds are a type of investment. Thus, the risk associated with bonds is quite low.	Loans, if granted with collateral, are considered to be low risk and come with lower interest rates, whereas unsecured loans have a higher interest rate.
Trading possibility	Bonds can be bought and sold, just like stocks, at suitable prices in the market.	Loans can not be traded, as the lending authority binds the conditions.

Benefits of Bonds and Loans

Now that you know the two most popular debt instruments, let us clearly understand the features and benefits of bonds and loans in detail.

BENEFITS OF BONDS:

1.  Regular Income: Bonds are essentially fixed-income securities that ensure that your lent money will be paid back with interest. These ‘coupon payments’ or interest received at fixed intervals (usually semi-annually or annually) become a consistent source of income.
2. Low Risks: Although the value of bonds might also fluctuate in the future, investing in bonds is considered a relatively safer option. If the issuer of the bond is the government or any stable company, the risk factor is low. 
3. Diversify Your Investment Portfolio: If you do not want to keep all your eggs in one basket, then diversifying your portfolio by investing in bonds is a great option. Adding bonds to your portfolio can help balance out the higher risk of stocks. If the stock market is down, bonds might hold their value better, reducing your overall losses.   
4. Capital Savings: When a bond matures, the issuer pays back the original amount you invested. Thus, investing in bonds helps you preserve your capital.
5. Tax Benefits: Some government bonds in India offer tax benefits (For example, tax-free interest coupons), which help increase your overall returns.   
6. Easy to liquidate: Bonds can be easily traded on the secondary market (just like the stock market), so you can sell them easily if you need money before maturity.

To sum it all up, bonds are a stable, predictable, long-term investment tool where assured returns are accrued and are also considered to be low-risk investments.

BENEFITS OF LOANS:

1. Higher Returns: Loans are debt instruments issued by companies. If you are lending to smaller companies, startups or individuals, loans can offer higher interest rates than bonds. However, you need to ensure the credibility of the borrower in this case because higher returns come at a higher risk quotient. 
2. Peer-to-Peer Lending: This helps you connect directly with the borrowers in person. It is because of this option that there is more accountability in the case of loans.
3. Monthly Interest Payouts: Loan investments can provide you with regular monthly interest payments, unlike interest coupons in bonds that can be received bi-monthly or annually. 
4. Secured Loans: These types of loans are secured by a collateral (like a property or any other asset). So, if the borrower defaults, you can seize the collateral to recover your investment. 
5. Flexibility in deciding repayment terms: As a loan issuer, you get to decide the interest rate, repayment term and various other terms and conditions. 

Interest Rate Variations for Bonds and Loans

A variety of factors influence interest rates on bonds and loans. Let us understand the key difference between bonds and loan interest rates and what factors decide interest rates in each case:

Factors affecting Interest rates in Bonds

1. If a bond has a high credit rating, it implies lower risk, leading to lower interest rates.   
2. General interest rates in the economy affect bond returns. When interest rates rise, bond prices fall, and vice versa.   
3. If inflation is rising, interest rates will rise, too, to compensate lenders for the decreased purchasing power of their money.   
4. Other economic factors like GDP growth, unemployment rates, and government policies can impact bond yields.   

Factors affecting Interest rates on Loans

1. Loans are issued with lower interest rates if the credit score of the borrower is higher.   
2. If the income and DTI (Debt-To-Income) ratio is low, then there are higher chances of getting the loan at a lower interest rate. 
3. Larger loan amounts and longer terms may result in higher interest rates.

How to Choose Between Bonds and Loans?

Bonds and loans are both financial instruments that can be chosen to gain interest, but only bonds can be traded with flexibility. They have different characteristics. Thus, it is important to consider the following factors before making a choice:

1. Creditworthiness of the lender
2. Funding speed 
3. Needs and preferences 

So, the best choice depends on your financial situation and goals. 

Investment Strategies for Bonds and Loans

Investment strategies for bonds and loans are very different. 

• For bonds, investors try to diversify their portfolios by investing in a variety of bonds with different maturities, credit ratings, and issuers. This diversification is a smart way to mitigate risk and maximize returns. Investors may consider using bond funds, which pool money from multiple investors to invest in a diversified portfolio of bonds.
• However, a personal loan strategy relies on two pillars: responsible borrowing and timely repayment. Borrowers should carefully consider the interest rate, loan term, and repayment terms before taking out a loan. To minimize interest costs, it’s advised to make timely payments or try to pay off the loan early. 

Bottom Line

The right choice between bonds vs debentures depends on your financial goals and risk appetite. Stashfin makes loan applications and financial planning seamless by being your one-stop app that offers insurance, bonds, and instant loans with zero paperwork.  Partnered with reputed and well-regulated entities such as SBM Bank, DMI Finance, Visu Leasing Finance, AU Small Finance Bank, Kisetsu Saison Finance, Chola Finance, and Western Capital, Stashfin lets you enjoy the convenience of paperless loans, competitive interest rates, and personalized financial advice most securely. 

The cherry on top is the expert guidance that can help you make a strong portfolio with high ROI. Happy Investing!

Frequently Asked Questions:

1. Can a loan be a bond?

No, loans and bonds are two different entities.

2. Can I get a loan against a bond?

Yes, you can get a loan against bonds which is called Loan Against Securities (LAS). 

3. Why are loans better than bonds?

Loans are not ‘better’ or worse than bonds. While loans are situational, bonds are financial investments. Loans are typically used to access funds for immediate needs whereas bonds, on the other hand, are less risky than loans, as the issuer’s assets back them.

4. Are bonds cheaper than loans?

Not necessarily. Generally, bonds have lower interest rates than loans because bonds are often considered less risky, especially government bonds. However, loans have higher interest rates.