Differences Between A Loan & An Investment [Loan Vs. Investment]

Both loans and investments are examples of the utilization of bank funds. Banks provide credit to the clients and cam interest from it.

On the other hand, if banks have excess loanable funds, they may invest in money market or capital market instruments and earn dividends, interest, or bonus shares.

However, there are some key differences between loans and investments. In the following section, we will try to identify these:

Points of Differences	Loan	Investment
Transaction Type	Debit transactions.	Mostly equity transactions.
Contacts	Direct.	Indirect and impersonal.
Knowledge of Maturity Period	Known to leaders, borrowers, and other interested parties.	Except for debentures, not known in other types of instruments.
Term	It may vary from several days to even 40 years.	Depends on the investment policy of the banks.
Negotiation	Knowledge of the Maturity Period	No scope for discussion as all the terms and conditions are pre-fixed and not negotiable.
Purpose of the raised Funds	Leading banks are expressly informed.	Installment purchasing/investing banks are not aware.
Income Source	Only interest and penal interest.	Dividends, bonus shares, right shares, capital appreciation gains, etc. But, for debenture, interest only.
Operation Area	Mostly within the command area.	The operation area is wider, both national and international as well.
Intensity & Extent of risk	Based on the views of both bank bankers and borrowers.	Risks depend on the types of instruments, but the risk is comparatively lower than the risk of the loan.
Volume of fund	Except for industrial loans, most of the tire loans are of smaller volumes.	Mostly volume of funds is large.
Shift ability	Shift ability is challenging (except securitization in some cases).	Shift ability is relatively easier and can be done even with some loss on conversion.
Termination	Successful termination depends on the willingness of the borrower	Terminated at the willingness of the bank/shareholder or holder of the debentures