Difference Between Bonds & Loans

Most homebuyers take out a mortgage loan with a bank to pay for the house.

Most homebuyers take out a mortgage loan with a bank to pay for the house.

Bonds and loans are both debt instruments, although they are not quite the same thing. Generally, bonds can be traded and are issued by companies or governments to raise money, while loans are individual debt obligations, but the relationship becomes murky over the point of securitization, which allows banks to package groups of loans into bonds.


A loan is a debt obligation between an individual and a creditor. Examples of loans include car loans, mortgages, personal lines of credit and even pawn shop loans. The creditor need not be a bank. Loans can be secured or unsecured: if a loan is secured, that means the debtor has put up some kind of collateral that the creditor will take in the event that the debtor fails to replay the loan. For example, the collateral in a mortgage is the house.


When a company or a government wants to raise money, whether that is to finance a new project, meet existing obligations or cover operating costs, it can sell bonds. With the help of an investment bank, corporations and governments sell bonds to the public, with the interest rates and prices varying according to the seller's needs and creditworthiness. A company's bondholders don't get any control over the company the way stockholders do, but they receive interest and will be paid before stockholders in the event that the company goes bankrupt.

The Bond Market

Once a company or government issues bonds, the holders are free to sell the bonds to other investors in the secondary bond market. The buyer of a bond might be interested in a bond's interest payoff or the potential to sell the bond later at a higher price. In general for bonds in the bond market, yields and prices are inversely related.


While loans are usually personal debt relationships between one person and a creditor, if the creditor is a bank or other major financial institution, it may bundle up loans and turn them into a bond, selling them on the bond market. A notable example of this is mortgage-backed securities, which are bonds that pay off based on the performance of the underlying set of mortgages that makes up the bond. If a significant amount of the mortgages end in bankruptcies, the mortgage-backed securities lose much value, as occurred in the 2008 financial crisis.


About the Author

Andrew Gellert is a graduate student who has written science, business, finance and economics articles for four years. He was also the editor of his own section of his college's newspaper, "The Cowl," and has published in his undergraduate economics department's newsletter.

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