The difference between borrowing and lending is the bedrock of many transactions carried out in an economy, impacting both individuals and institutions profoundly. While they may seem similar superficially, these denote two fundamentally distinguishing concepts and separately govern the flow of capital in economies.
To know more about the fundamental distinctions between these two concepts, read on.
It is a practice where you obtain funds for temporary use with the intent to repay it with interest. The meaning of borrowing money is receiving funds at a pre-defined interest rate.
It is the opposite of borrowing, where a financial institution provides you with funds in exchange for a guarantee provided for repayment. In other words, the meaning of lending money is providing someone with funds instead of earning interest.
To understand the difference between borrowing and lending, check out how these concepts work.
Though both involve the transfer of money or assets, these concepts represent opposite ends of a financial transaction. Check out the table provided below to learn about the difference between borrowing and lending.
| Basis | Borrowing | Lending |
|---|---|---|
| Meaning | It is when a deficit entity takes funds from a surplus entity on terms agreed upon mutually | It is the practice of providing money by a surplus entity to a deficit entity based on a mutual understanding |
| Purpose | The purpose of borrowing funds depends on the borrower’s financial requirements and objectives | Banks and other financial institutions lend money to earn interest |
| Flow of Capital | Capital flow from the money deficit entity to the surplus entity | Money flow from the resource surplus institute to the deficit entity |
| Parties Involved | Both borrowers and lenders are part of the transaction | Lenders and borrowers take part in the transaction |
| Terms of Transaction | In the case of borrowers with strong financials, the terms of loans are agreed upon by both parties mutually | While the terms are agreed upon mutually, the lending institutions generally dictate them |
| Interest Charges | Since they receive money, borrowing entities are typically at lower risk | Lenders are generally at higher risk, as borrowers can default on repaying the loan amount |
| Risk Exposure | The borrowers have to pay interest based on the rates pre-determined at the time of sanctioning the loan | The lenders receive interest payments along with the principal amount |
| Examples | A bank named XYZ provides ₹10 lakhs to an individual ABC, where the latter is a borrower | In the same example, the bank named XYZ is the lender |
Now you may have understood the implication of lend vs borrow on capital flow. This knowledge allows you to approach financial decisions with greater confidence. If you find yourself in need of surplus funds, explore Fibe’s Instant Personal Loan offered at competitive rates. Download the Fibe Personal Loan App or register on the application to get a loan with a flexible repayment option and minimal documentation.
The former is the rate at which banks and other financial institutions provide you with funds and charge interest. The borrowing rate determines the interest along with the principal amount you will have to pay as a borrower.
Yes, both these terms are opposite of each other.
Financial institutions generally perform both functions. While banks lend money to retail borrowers, they also borrow money from the central bank as a macroeconomic measure to control inflation.
