NEW! Our Hero’s Journey tool can help you with your next step towards financial freedom - click here to try now.
Advertiser Disclosure

Loans vs grants: what’s the difference?

Loans vs grants: what’s the difference?
Image source: Getty Images


The terms ‘grant’ and ‘loan’ are often used interchangeably to describe a form of financial aid. The two types of financing are actually different.

Here’s a quick look at how grants and loans differ to help you identify the best option for your needs.

Plot your path towards financial freedom with our Hero’s Journey tool!

MyWalletHero is here to help you learn about taking control of your money, whether that’s paying off debt, working towards a short-term money goal, or investing for your future.

This tool can help you understand the next steps on your journey – simply choose a goal that best describes your current interests to get started.

What is a loan?

A loan is a sum of money given to an individual or business with the expectation that it will be repaid over time with interest.

The funds can be used for whatever purpose the borrower sees fit, such as starting or expanding a business, purchasing equipment or repaying other debts.

There are two main types of loan:

  • secured
  • unsecured

A secured loan involves you putting up collateral property or assets such as a car or a house. If you fail to repay the loan within the agreed time, the creditor can take possession of these assets.

Examples of secured loans include homeowner loans, bridging loans and logbook loans.

An unsecured loan does not require any collateral. As a result, the value of the loan is usually lower.

Examples of unsecured loans include personal loans, bad credit loans and peer to peer loans.

What is a grant?

A grant is a financial award given to a person, business or organisation which is intended for a specific purpose and that doesn’t have to be paid back.

Grants are usually awarded by the government, charitable organisations, trusts and educational organisations. The aim of a grant is to promote some public good.

For example, the government may give a business a grant on the condition that it provides jobs in an area where there’s high unemployment.

What’s the difference between a loan and a grant?

Repayment

This is the main difference between loans and grants. If you take out a loan, you must repay the amount borrowed, whereas a grant does not have to be repaid.

Source

Grants usually come from the government and sometimes from charitable organisations, trusts, and educational organisations.

For example, at the moment, the UK government is providing financial support in the form of grants to people and businesses affected by coronavirus. Among the grants on offer are the Restart grant and the SEISS grant.

Loans, on the other hand, can be obtained from a broader range of sources, such as private parties or individuals, businesses, banks and financial institutions, and the government.

Amount

The amount of funding available through a grant is typically less than that available through a loan, owing to the fact that you do not have to repay it. Loan amounts can vary, whereas grant amounts are almost always fixed.

Application and eligibility

A grant is free money for you or your business, but it can be difficult to obtain because you must meet certain strict terms and conditions. The application process can be lengthy, and access can be difficult.

Obtaining a loan, on the other hand, is much simpler and requires far less formality and has fewer conditions.

Loan vs grant: which is right for you?

If you are looking for funding, asking yourself these questions can help you determine whether a grant or a loan is best for your situation.

1. What do I need the funds for?

Does your goal or project meet the aims or criteria of a grant that is available? If your answer is no, you may need to apply for a loan.

2. How soon do I need the funds?

The grant application process can be lengthy and complicated. If you need the money right away, a loan may be the best option. However, if you are willing to invest the necessary time, effort, and research, a grant may be worth the trouble.

3. Can I repay the money?

This goes without saying, but if your ability to repay the loan is in doubt, a grant may be a better fit for your circumstances.

Final word

Loans and grants can both provide you with the funds you need to achieve your goals. There are fundamental differences between the two. One choice isn’t inherently superior to the other. Do your research to see which kind of funding is most suitable for your needs.

Was this article helpful?
YesNo

4 iron-clad rules for saving money on everything

Our Editor Sam Robson has been on a personal cost-cutting mission for years – and it’s time to share his wisdom.

Check out his choicest saving tips and tricks in this free report, “Sam’s 4 Iron-Clad Rules For Saving Money On Everything”.

Just enter your email below for instant access to your free copy.

By checking this box and submitting your email address, you agree to MyWalletHero sending you emails with money tips, along with details of products and services that we think might interest you. You can unsubscribe from future emails at any time. You also consent to us processing your personal data in line with our privacy policy, and our cookie statement. For more information, including how we collect, store, and handle personal data, please read our Privacy Statement and Terms & Conditions.


Some offers on MyWalletHero are from our partners — it’s how we make money and keep this site going. But does that impact our ratings? Nope. Our commitment is to you. If a product isn’t any good, our rating will reflect that, or we won’t list it at all. Also, while we aim to feature the best products available, we do not review every product on the market. Learn more here. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Barclays, Hargreaves Lansdown, HSBC Holdings, Lloyds Banking Group, Mastercard, and Tesco.