If you look at the definition of a grant and a loan, you will see similar meanings.
So what’s the difference between a grant and a loan?
An interesting thing you might have noticed is that these words rarely appear by themselves. They always have a descriptive word before them, for instance, a “research grant” or a “home loan.”
So what makes these two things distinct?
This article will discuss grant vs loan, their main distinctions, and their advantages and disadvantages.
Let’s dive in.
What Is a Loan?
A loan is a sum of money borrowed by an individual or an organization. This can come from banks, private lenders, or even individuals. The defining characteristic of a loan is that it needs to be repaid to the lending party.
Loans can come in different types and can be categorized by several other factors. For example, based on need, there’re options like home loans, car loans, and personal loans.
Similarly, based on the time they need to be repaid, loans can be short-term or long-term. For example, a home loan is usually a large sum and is repaid over ten to twenty years. This counts as a long-term loan.
On the other hand, a short-term loan is a personal loan that can be repaid in one to two years. Think of a cash loan as a credit card but with more purchasing power. Instead of having a few thousand dollar credit limit, you can potentially have upwards of several tens of thousands.
Another example of a typical loan is a small business loan. If you’re an entrepreneur trying to set up a business, you can approach a bank or a private lender and apply for a loan. Depending on your bank’s decision based on your pitch, your loan might get approved or turned down.
Loans for high amounts also require collateral. Collateral is usually an asset given to the borrower’s lender as a promise that you will repay the loan. For example, in the case of home equity loans, the borrower’s house is the collateral.
The bank has the right to take possession of the property if the recurring payments towards repaying the loan ceases.
The Advantages of a Loan
While a loan has to be repaid to the lending party in full with interest, there are several advantages to this money-borrowing system.
Chance to Grow: A loan gives the borrower a lump sum of money that can be used towards building a home, buying a car, or starting a business. This makes these loans an excellent way to improve the borrower’s lifestyle if they repay the amount.
More Sources: Loans are available from multiple sources. If you have a good credit score, income source, or an asset that you can provide as collateral, you can get a loan from a reputed bank with a reasonable interest rate.
Tax Breaks: If you get a bank loan and a part of your annual income goes into repaying it, you can get a big break on your taxable income.
The Disadvantages of a Loan
Although a loan can be a great way to improve your lifestyle, it can have downsides. There are certain disadvantages and restrictions that you need to note before you apply for a loan.
Repayment: It doesn’t matter the circumstances. You will be expected to repay the lender their money with interest.
Interest Rates: If you’re taking a long-term loan, you could have a very high interest rate. It’s not unheard of for some interest rates to be almost twice as much as what you borrowed.
Strict Rules: Banks do not give much leeway when it comes to repayment periods and timetables. If you’re unable to make the payments on your home loan, your bank has the option to foreclose and take possession of your home.
Debt: Let’s face it: being in debt sucks. Many people pride themselves on not having ever been in debt. If you must be in debt, make sure it’s good debt (debt that builds you wealth). Or you can make sure your debt doesn’t exceed your liquid assets. Either way, debt isn’t a desirable state to be in for long.
What Is a Grant?
Unlike loans, grants do not come with the expectation of being repaid. While a loan is a sum of money that someone has borrowed, a grant is practically a gift.
Banks or private lenders do not usually offer grants. Governments, corporations, or trusts provide grant opportunities. Lenders may offer grants for various reasons: non-profit social activities, medical or scientific research, or education.
You can look at a grant as a financial award that helps an individual or an organization work towards a goal.
Grants also do not affect your financial history or your credit score, as there is no need for repayment in this system. Once you put forward your case, pitch, or idea for working on a specific goal, a grant can be awarded to you as a gift of merit.
The Advantages of Grants
While loans have their own system and differ from grants, there are ways in which grants are much more advantageous than loans.
No Repayment: Perhaps the most important and obvious way grants are advantageous is that there is no need to repay the money. There are no regular payments or payback requirements that come with a grant.
Risk-Free: Once you have been awarded the grant, either for business or school, you’re scott-free. Even if you fail at your goal, your credit score or financial history will not suffer.
Government Involvement: When the government is involved in a particular project, it is not the same as your friend just giving you some money for something you’re interested in. You can use the influence and capital of government departments to facilitate your cause.
The Disadvantages of Grants
While grants sound like a no-loss situation, it’s not necessarily all sunshine and rainbows.
Grants come few and far between, and, if you fail, good luck trying to get another one.
Some people even dare to scheme educational grants, but we’re sure we don’t have to tell you why that’s not a good idea.
Now let’s go over some other disadvantages:
Not Enough Choices: While you can get a loan from multiple banks or individual lenders, the same is not true for grants. You have to put in the research, make a proper presentation, and be updated on your field’s latest developments before you apply for a grant.
Low Success Rates: Similar to the previous point, the success rate of obtaining a grant from a government or a corporation is meager.
Responsibilities: Grant money does not come with repayment requirements as in the case of loans. But, if you’re irresponsible, you’ll kill your chances of getting more funds from the institution you borrowed from.
What’s the Difference?
In a nutshell, the fundamental difference between a grant and a loan is that a loan eventually has to be repaid, while a grant does not.
There are several advantages and disadvantages to both of these capital options, and it’s always better to be in the know when it comes to finance.