Monday, December 19, 2011

Interesting facts-Difference Between Lending and Financing

Difference Between Lending and Financing

Lets deal with lending first. A bank or even your neighbour can lend you money. You may or may not have to put up collateral to secure the loan. Say you borrow $100 from your mate and promise to repay the $100 in 2 weeks time. He may ask you to give him something of similar value that he can "hold" until you repay him, this is collateral. He is not interested in why you want the $100. He just wants his money back in 2 weeks or he will sell your collateral and recover his $100 loan to you.

In financing, you buy a specific item usually with a specific interest rate over usually a specific time frame. The best example here may be a car or house or similar asset. If you default (miss payments) before the end of the payment period, the person / bank that financed your specific asset can (within reason) take away the specific asset that you financed and sell it to recover his / their debt.

So in a nutshell, financing (often called asset based financing) is the funding for a specific item and lending is generally non specific i.e. simply a loan


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