Bond vs. Loan: What's the Difference?

Bonds let businesses raise money from investors, who may then collect interest. Meanwhile, loans provide a specific sum, in exchange for the borrower making regular repayments that include interest.

Understanding the differences can help you figure out which is the best option for you.

Let’s explore what bonds and loans are, their differences, pros and cons and what factors can help you decide between these options.

What is a bond?

A bond is a fixed-income loan. In purchasing bonds, investors provide a source of temporary funding to the bond issuer, with the expectation of getting that money back later with interest.

For example, a business may create bonds to raise funds to expand the company. They could then sell off those bonds, offering investors the opportunity to earn interest, or a “coupon.” If held until the maturity date, the investor gets their principal back as well.

Bonds can be issued by several sources, such as:

• Corporations: Businesses may use corporate bonds for a wide variety of purposes, from buying new equipment and investing in research to buying back their own stock and refinancing debt
• Municipalities: Municipal bonds (or “munis”) are made by state and local governments to fund their existing obligations as well as projects, like building schools or highways
• U.S. Treasury: In the United States, the Treasury issues bonds backed by the federal government

Typically, Treasury Bonds mature after 20 to 30 years. However, short-term bonds (those with maturities under 3 years) also exist.

What is a loan?

A loan is a structured agreement between a lender and a borrower. In exchange for receiving money, the borrower agrees to repay that amount (called the principal), plus interest. The time that the borrower has to repay that debt is called the loan term.

Some common examples of loans include:

• Personal loans: These loans may be used for a wide variety of purposes. Personal loan APRs can range widely depending on the source. These loans may offer short- to medium-term repayments.
• Mortgages: Home loans use the purchased property as collateral and often involve a down payment
• Business loans: Business owners may use this type of loan to get financing for their business, ranging from startup loans to equipment loans and more

You may get a loan from several sources, including banks, credit unions and online lenders. Some loans may require collateral. That's an asset that secures the loan in case the borrower can’t pay.

Common loan terms range from 1 to 30 years, depending on the lender and type of loan.

Bond vs. loan: Key differences

Both of these tools may offer borrowing opportunities, but there are important differences between bonds and loans. Those range from who issues them and how they're repaid to their liquidity and purposes.

Issuer and borrower relationship

• Bonds: Issued by corporations and governments to multiple investors
• Loans: Issued by a lender to a single borrower or entity

Tradability and liquidity

• Bonds: May be traded in financial markets
• Loans: Are typically not easily traded
  

Interest rate and repayment structure

• Bonds: Fixed or floating interest rate; typically offering periodic coupon payments
• Loans: Payments typically go toward principal and interest and span a number of months or years

Purpose and use cases

• Bonds: Often used for large-scale funding like infrastructure and corporate expansion as well as cash flow
• Loans: Used for personal or business financing needs

Pros and cons of bonds vs. loans

Understanding the pros and cons of bonds and loans may help you weigh your options.

Advantages of bonds

Bonds may offer issuers potentially lower interest costs, allowing them to save money. Businesses may also set their own bond terms, meaning they may tailor those to their needs. From the investor’s perspective, these vehicles can offer the chance to earn a steady return, and given their tradability, they may be able to take advantage of the bond’s liquidity, if needed.

Disadvantages of bonds

Although bonds can offer value, it’s worth noting that some bonds, particularly high-yield bonds, may have a higher credit risk for investors. Interest rate fluctuations can also impact the value of bonds, and those rates may also depend on the issuer’s creditworthiness. Newer businesses may find it more difficult to offer investors an enticing bond.

Advantages of loans

Loans provide borrowers a lump sum of cash, and, given the wide array of options, there may be an opportunity to shop around for the custom repayment terms that best suit your needs. When it comes to repayment, loans also offer a predictable cost of both principal and interest that may be easily incorporated into your budget.

Disadvantages of loans

Some loans may come with higher interest rates for borrowers, which increases the long-term costs. Terms are also based on the borrower’s creditworthiness, so some may find it difficult to qualify or access the terms they desire. There is also generally less liquidity with loans, as they cannot be easily sold.

Choosing between bonds and loans

When it comes to bonds and loans, the best option depends on what you’re looking for. Some of the factors you may wish to consider here include:

• Time to funding: Bonds can take time to sell. Funding time for loans may vary by type and institution.
• Interest rates: Bonds may offer lower rates than loans for businesses
• Returns: Investors may earn returns from bonds, while lenders benefit from loans
• Liquidity: Bonds may be bought and sold in financial markets, while loans generally may not
• Risk: Treasury bonds tend to be less risky than corporate bonds, but may not offer as high of a return

Bonds and loans may each have their place in financial plans. Once you understand the differences and make your choice, you can put your plan into action.

Citi offers personal loans to both existing Citi customers and new to Citi customers that meet specific eligibility criteria, including an established credit and income history along with additional factors determined by Citi. If you think you could benefit from a Citi Personal Loan, apply online today.

This article is for general educational purposes. It is not intended to provide financial. It also is not intended to describe any Citi product or service. You should refer to the terms and conditions financial institutions provide for various products.