Lending VS borrowing are different activities with distinct meanings and purposes. The act of borrowing, on the other hand, entails receiving funds from a different person or financial organization (such as a bank or NBFC), intending to pay back the borrowed funds (principal plus interest) later.
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What exactly is Lending & Borrowing?
Lending is the act of lending money to someone to recoup the initial amount plus interest if it is a commercial loan after a set period. If a bank lends you money in the form of a commercial loan, the bank has the right to charge you interest on the money you borrowed. Lending is not only about money; it may also be about things. You may also lend things to someone to return them after a set length of time.
Borrowing
Borrowing, on the other hand, is the act of borrowing money from another person or a financial organization to repay the borrowed amount after a set period. The goal of lending money is to earn interest on the amount of money given to someone for a set period. The goal of borrowing is to use the money for specificized goals such as house building, medical expenditures, hospital charges, school education, further education, private functions, and so on. Borrowing may also be done in terms of objects, much like lending. In brief, you can borrow items to return them to the owner after a certain length of time or, preferably, after usage.
Borrowing and Lending Example
ABC Ltd. is a corporation that develops infrastructure projects. They require $100 million in cash to finish their planned road development project. As a result, they attempted a bank (XYZ Ltd.) to get money for the project for 0 million, and they secured a funding from the bank on equally agreed commercial conditions.
In the preceding scenario, XYZ Ltd. lends money to ABC Ltd. And in this case, XYZ Ltd. is the lender. Similarly, in this situation, ABC Ltd. gets money from XYZ Ltd. to execute the road project.
The Key Differences Between Borrowing & Lending
- Borrower versus. Lender. The Lender perceives himself as the major figure in the deal since he feels he has the upper hand because the borrower is more interested. The borrower appears to have the upper hand since he has a vested interest in the borrowed thing.
- Exposure to Risk Lending entities in these transactions is often at greater risk due to the potential of borrowing entities failing to refund money to the lending company. Borrowing entities are less risky than lending entities since they get funds from the lending entity for their enterprises.
- Fundamental Definition. Borrowing occurs when an organization or entity obtains money from another entity that is repayable after a specified period and carries an interest rate.
- Grammar. Lending is an action verb. Borrowing is a verb.
- Important Items. While borrowing involves something other than money.
- Motto. In lending, the intention is to earn something, and that one has access to himself. When it comes to borrowing, the goal is to obtain something that one does not own and is willing to pay the same price.
- Others are Like Words. Different terminology for lending will mimic the world of finance, such as going long in an asset (giving funds to the company and taking stock of that company). Reverse Repo is another, in which big banks lend money for a day in return for collateral. For a day, the institutions in a repo borrow money (sell securities) in exchange for a piece of collateral.
- Payment of Interest. Lending entities get interest payments on borrowed funds depending on mutually agreed-upon parameters. Borrowing entities pay interest on borrowed funds depending on mutually agreed-upon parameters.
- Purpose. The main goal and purpose of lending money are to earn interest on the amount of money or principal lent to someone for a certain period. The aim or goal of borrowing, on the other hand, would be to utilize the money for specified objectives such as medical expenditures, house building, hospital bills, private functions, school education, further education, and so on.
- The Flow of Resources. The flow of money/resources in a transaction surplus to a resource shortage entity. The flow of resources from a resource surplus to a resource shortage entity.
- The main point. Lending implies giving up something in return for something else. In terms of borrowing, one would be taking up and trading something else, therefore paying a premium.
Conclusion
Lending and borrowing are two components of the same transaction, with one side acting as a lender and the other as a borrower. They entail mutually agreed-upon resource transfers from a resource surplus entity to a resource deficit one. In most cases, a lending entity receives interest on the borrowed entity’s funds.
[Read More: Lending Money – Your Resource For Everything Finance]
Both are necessary for any economy to flourish since they aid in the efficient usage and transfer of resources within the economy.
