Things you will know after reading this article:
- Concept of lending and borrowing.
- Basic principle of borrowing.
- Prominent difference between money and lending.
- Types of lending available.
What is “Lending”?
In layman terms, it is nothing but the action of allowing a person or organization the use of a sum of money under an agreement to pay it back later or as when someone allows another person to borrow something. Money, property, or another asset is given by the lender to the borrower, with the expectation that the borrower will either return the asset or repay the lender.
The question stands, how is Lending different from Borrowing?
In our day-to-day life the term “borrowing” comes quite handy. Remember when you borrowed a pen from your sibling a month ago? We keep borrowing things all the time, mostly unknowingly. Likewise, after you forgot to return the pen, your sibling asked you to make a cup of coffee as an equivalent return. This is the principle upon which borrowing works, which is to obtain or receive (something, such as money) on loan for temporary use, intending to give it, or something equivalent or identical, back to the lender to adopt from another source; appropriate not standard to lend.
The terms “Lending” and “Borrowing” are often used interchangeably, however they are not the same.
Here are the key differences between the two:
|In lending, the intent is to earn, and the object may be accessible to the lender on its own.||In borrowing, the intent stands to obtain a commodity one does not possess.|
|The key purpose of lending money is to gather interest, per say on the amount of time the money is lent.||The key purpose of borrowing is utilising the asset for specific purposes such as higher education, private functions, medical expenditure.|
|The main objective behind lending stands at making profit out of the money lent, rates of interest charged.||The objective behind borrowing stands at expecting a commodity amounting to the same value, or even less/more.|
|Lending involves funds that may belong to an organization and not to one personally.||Borrowing is mostly letting someone use a commodity that is a personal belonging.|
TYPES OF LENDING:
Lending can be broadly broken down into two categories: personal (or “consumer”) lending and business lending. Some types of loans are available in both personal and business lending, though they are handled differently.
For example, an individual can get a personal credit card to buy groceries and other basics, and a business can get a business credit card to buy equipment and other business expenses.
- Loans to even out cash flow- in this, banks allow companies to lent money based on the projected future cash flow.
- Commercial and Industrial loan- the banks provide the capital fund to the companies for its growth and working.
- Mortgages- this is used for purchasing a home, if there is a default in the loan, the bank can sell the house and recoup its money.
- Crowdfunding- this implies lending money for a new business, selling pre-orders of products, raising money for charity.
We can conclude the discussion by narrowing it down to the statement that be it lending, or borrowing, every transaction involves the principle of give and take. This does not change according to the object lent or borrowed, or the money. In some cases the money lent is aimed at gaining profits, or just as an amount of fund borrowed by a friend or a known person for a specific personal utilisation as discussed, in which the commodity taken in return maybe of the same value, or the lender considers it equivalent.