Debenture vs. Loan: What's the Difference?
Edited by Aimie Carlson || By Janet White || Published on December 20, 2023
A debenture is a long-term security issued by a company, backed only by its creditworthiness, while a loan is borrowed money that must be repaid with interest.
Key Differences
A debenture is a type of debt instrument not secured by physical assets or collateral, issued by companies to raise capital, promising to pay interest and principal. In contrast, a loan is a sum of money borrowed from a lender that requires repayment with interest, often secured by collateral.
Debentures are typically unsecured and rely on the creditworthiness and reputation of the issuer for investor confidence. Loans, however, can be secured or unsecured, and their approval usually depends on the borrower's credit history and ability to repay.
The interest rates on debentures are often fixed and are known to investors at the time of investment. Loans can have either fixed or variable interest rates, which can change over the loan's term.
In case of bankruptcy, debenture holders are considered unsecured creditors and are paid after secured creditors and bondholders. Loan lenders, especially those with secured loans, have the right to seize the collateral if the borrower defaults.
Debentures are a common method for large companies to raise funds without diluting equity. Loans are a more versatile financial tool, used by individuals, businesses, and governments for various purposes including personal finance, business expansion, and public projects.
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Comparison Chart
Security
Unsecured, no collateral
Can be secured or unsecured
Issuer/Borrower
Issued by companies
Borrowed by individuals, companies, governments
Interest Rate
Usually fixed
Fixed or variable
Purpose of Issuance
To raise capital for the issuer
Various purposes, personal or business
Repayment in Bankruptcy
Paid after secured creditors and bondholders
Secured loans paid first, then unsecured
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Debenture and Loan Definitions
Debenture
A long-term security issued by a company without collateral.
The corporation issued debentures to finance its new factory.
Loan
Borrowed capital often secured by collateral.
They used their house as collateral for the loan.
Debenture
A corporate financial instrument for raising capital.
To expand its operations, the company decided to issue debentures.
Loan
A financial arrangement where a lender provides funds to a borrower.
The business secured a loan to finance its new project.
Debenture
A debt instrument backed solely by the issuer's creditworthiness.
Investors bought debentures, trusting in the company's strong financial health.
Loan
A sum of money borrowed that must be repaid with interest.
She took out a loan to pay for her education.
Debenture
An unsecured bond promising to pay interest and principal.
The debentures offered a higher interest rate due to the lack of collateral.
Loan
A lending agreement with specified repayment terms and interest.
The loan had a five-year term with a 4% annual interest rate.
Debenture
A fixed-income security not secured by physical assets.
The debentures were attractive to investors seeking regular income.
Loan
Money lent for personal, business, or governmental purposes.
The government issued a loan for infrastructure development.
Debenture
A certificate or voucher acknowledging a debt.
Loan
An instance of lending
A bank that makes loans to small businesses.
Debenture
An unsecured bond issued by a civil or governmental corporation or agency and backed only by the credit standing of the issuer.
Loan
A sum of money that is lent, usually with an interest fee
Took out a loan to buy a car.
Repaid the loan over five years.
FAQs
Are debentures secured?
No, they are typically unsecured.
What is the interest rate like for debentures?
It's usually fixed and known at issuance.
What is a debenture?
It's an unsecured debt instrument issued by a company.
Can loans be unsecured?
Yes, loans can be either secured or unsecured.
Do loans have fixed interest rates?
Loans can have either fixed or variable interest rates.
Who can take out a loan?
Individuals, businesses, or governments.
Why do companies issue debentures?
To raise capital without diluting equity.
What is a loan?
It's borrowed money that must be repaid with interest.
What happens if a loan is defaulted?
If secured, the collateral can be seized; if unsecured, legal action can be taken.
What is a secured loan?
It's a loan backed by collateral.
For what purposes are loans taken?
For various personal, business, or public projects.
Can individuals issue debentures?
No, debentures are typically issued by companies.
Who issues debentures?
They are issued by companies.
What happens to debentures in bankruptcy?
Debenture holders are unsecured creditors and are paid after secured creditors.
Are debentures a long-term financial tool?
Yes, they are generally long-term debt instruments.
Is collateral required for debentures?
No, debentures do not require collateral.
Can companies take out loans?
Yes, companies often take out loans for various needs.
Can loans be short-term?
Yes, loans can be both short-term and long-term.
How do investors make money from debentures?
Through fixed interest payments.
How is the interest on loans paid?
It's usually paid monthly, but terms can vary.
About Author
Written by
Janet WhiteJanet White has been an esteemed writer and blogger for Difference Wiki. Holding a Master's degree in Science and Medical Journalism from the prestigious Boston University, she has consistently demonstrated her expertise and passion for her field. When she's not immersed in her work, Janet relishes her time exercising, delving into a good book, and cherishing moments with friends and family.
Edited by
Aimie CarlsonAimie Carlson, holding a master's degree in English literature, is a fervent English language enthusiast. She lends her writing talents to Difference Wiki, a prominent website that specializes in comparisons, offering readers insightful analyses that both captivate and inform.
