Differentiate between loans and advances.

 Loans and advances are both types of credit facilities offered by financial institutions to their customers. However, there are some significant differences between the two.

1. Nature of Credit:

Loans are a form of credit that are provided for a fixed period and are generally repaid in equal instalments. The interest rate on loans is generally fixed and is based on the amount borrowed, the term of the loan, and the creditworthiness of the borrower. Loans are generally provided for long-term financing needs, such as purchasing a house or a car, or for starting a new business.

On the other hand, advances are a form of credit that are provided for short-term financing needs. Advances are generally provided against a collateral security or on the basis of a customer's creditworthiness. The interest rate on advances is generally higher than that of loans, and the repayment period is shorter.

2. Purpose:

Loans are generally provided for specific purposes, such as purchasing a house, a car, or for starting a new business. Loans are provided on the basis of the borrower's creditworthiness and ability to repay the loan.

Advances, on the other hand, are generally provided for short-term financing needs, such as purchasing raw materials, paying salaries, or for meeting other short-term working capital requirements.

3. Security:

Loans are generally provided against a collateral security, such as a house or a car. In case of default, the financial institution has the right to seize the collateral and recover the loan amount. Loans may also be provided on the basis of the borrower's creditworthiness.

Advances, on the other hand, are generally provided against a collateral security or on the basis of a customer's creditworthiness. Advances may be secured or unsecured, depending on the amount and the creditworthiness of the borrower.

4. Repayment:

Loans are generally repaid in equal instalments over a fixed period of time. The repayment period may range from a few months to several years, depending on the amount and the purpose of the loan.

Advances are generally repaid within a short period of time, usually within a few months to a year. The repayment period may be extended on the basis of the borrower's creditworthiness and the nature of the advance.

In conclusion, loans and advances are both credit facilities offered by financial institutions to their customers. Loans are generally provided for long-term financing needs, such as purchasing a house or a car, while advances are provided for short-term financing needs, such as purchasing raw materials or paying salaries. Loans are generally secured against a collateral security, while advances may be secured or unsecured, depending on the amount and the creditworthiness of the borrower.

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