Difference Between Lending and Borrowing

Example of Lending and Borrowing

A company, ABC Ltd., is developing infrastructure projects. They need funding to the extent of $100 million to complete their upcoming project for developing a road. Therefore, they approached a bank (XYZ Ltd.) to avail funding to the extent of $100 million for the said project and received a grant from the bank on mutually agreed commercial terms.

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In the above example, XYZ Ltd. is lending money to ABC Ltd. This process is known as lending, and XYZ Ltd., in this example, is the lender. Similarly, ABC Ltd., in this case, receives funds from XYZ Ltd. to complete the road project. This process is known as borrowing, and ABC Ltd. is known as a borrower.

Lending vs Borrowing Infographics

Key Differences

The key differences are as follows: –

  • A process is known as lending when an entity or person gives away its resources to another entity or person per predefined mutual terms. In contrast, the process of receiving resources by an entity or person from another entity or person with predefined mutually agreed upon terms is known as borrowing.Both are part of single transactions with different purposes of parties involved.Lending is the process of giving money to an entity/person. However, borrowing is receiving money from an entity/person.In borrowing, resources are borrowed by a resource deficit entity from a resource surplus entity. However, in lending, resources are lent to a resource deficit entity by a resource surplus entity.The lending entity in the transaction receives interest against the moneylender to the borrower. However, the borrowing entity pays interest to lend a set-up against the borrowed money.Both are very critical to the economy of any country and operate with different purposes/business models. Lending the entity’s purpose is to earn interest on the money lent to borrowing entities. However, the borrowing entities borrow money for their business expansion, or individuals borrow money to meet their goals such as house construction, children’s education, etc.Both are executed on commercial or non-commercial terms based on the nature of the transaction. However, lending entities and borrowers who dictate the terms of transactions have a relatively lesser say.Regulatory compliances for lending entities are much stricter than the borrowing entities.

Comparative Table

Conclusion

Lending and borrowing are parts of a single transaction wherein one party is a lender, and the other is the borrower. Both are required for a lending or borrowing transaction to be completed. They involve resource transfer from resource surplus entity to resource deficit entity on mutually agreed terms. A lending entity generally gets paid interest on the borrowed entity’s money.

Both are critical for any economy to grow as this helps in the effective utilization and transfer of resources systematically within the economy.

This article is a guide to Lending vs Borrowing. Here, we discuss the difference between lending and borrowing, infographics, and a comparison table. You may also have a look at the following articles: –

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