What Is the Difference Between a Grant and a Loan?

Writer:

Ana-Maria Sanders

Editor:

Jim Hughes

Reviewer:

Sophia Rodriguez

A grant is money awarded to an individual or institution for a specific use. It is usually given out to support research, fund a project, education, or community development. 

Unlike loans, grants do not need to be repaid. That is why, in some cases, a grant is used to help people stop living from paycheck to paycheck.

However, keep in mind that grants may have restrictions and requirements that affect eligibility, and most are highly competitive due to high demand and limited availability.

Grants can offer several advantages to the recipient. Here are just a few:

1. Grants provide financial support without the obligation to repay.
2. Grants are a great motivator for investing time and energy into a project. When you have the proper funding to achieve something, you will be encouraged to work toward it. 
3. Grants can help support essential services, outreach programs, and operational costs of non-profits.
4. Receiving a fund can make an organization look more appealing to other donors or investors. It acts as a stamp of approval to other financial institutions or investors. 

While a grant can be a very useful form of funding, there are some drawbacks.

1. Grants can be very competitive. Even qualified applicants may not receive the funding they need. 
2. Grants have rules regarding their use, which may limit an organization's or individual's choice of how to spend the money.
3. The application process is often lengthy and extensive, requiring detailed proposals, budgets, and plans. 
4. Some grants may offer funding for a limited amount of time, which might not be enough to cover the full scope of the project. 

What Is a Loan?

A loan is a type of credit given to a party in exchange for repayment. It can be used for a variety of expenses. Loans are relatively flexible regarding qualifications and guidelines on what the money can be used for. However, unlike grants, loans require repayment with interest and sometimes other fees as well.

Government loans, specifically, are sometimes used by those who cannot access a private loan. The government doesn't directly provide loans; they usually go through banks, credit unions, and other private lenders. Common types of government loans include:

Advantages of Loans

Taking out a government loan can have several benefits, such as immediate access to funds and the possibility of improved credit scores. 

• Reduced Interest Rates: Government-backed loans are often more affordable since they may have lower interest rates than private loans.
• Flexible Repayment Terms: A lot of government loans come with alternatives for income-based repayment programs as well as longer repayment periods.
• Simpler Qualification: The eligibility requirements can favor those with less credit history or lower credit ratings.
• Government Guarantees: Lower the risk for lenders and increase their willingness to lend money to people who might otherwise be viewed as high-risk borrowers.
• Interest Subsidies and Loan Forgiveness Programs: Government loans can drastically lower the total loan amount. An example is the Public Service Loan Forgiveness for student loans.

Disadvantages of Loans

There are also drawbacks that borrowers should consider.

• Interest and Additional Costs: Loans come with interest and various fees, increasing the total repayment amount.
• Strict Conditions for Eligibility: Government loans are more easily obtained, but qualifying is still required, which can be a barrier for some candidates.
• Limited Loan Amounts: The maximum amount you may borrow from a government loan is frequently capped, so it might not be enough to meet all of your demands.
• Long Approval Process: Applying for and getting approved for government loans can be a laborious procedure that requires a lot of paperwork.
• Usage Restrictions: Compared to private loans, government loans frequently include rules about how the money can be used.

Key Differences Between Loans and Grants

Although grants and loans are both meant to provide people with financing, there are key differences between the two options. The most significant difference is that loans must be repaid, while grants are gifted to the recipient. Loans, like a cash advance, involve interest rates, repayment deadlines, and credit checks before one can qualify. Grants, on the other hand, can only be used for a specific purpose and are very competitive.

Here is a breakdown of the differences:

Similarities Between Loans and Grants

Despite the differences, grants and loans also share some similarities. Both are meant to provide funding to the recipient. Additionally, parts of the process of applying for a loan or grant are similar. Finally, for both grants and loans, the funds may be provided by a bank, institution, or government.

What Is a Business Loan?

A business loan is a loan that provides a business with the funds to cover various expenses and projects it may have. These can include real estate, expansion, marketing, equipment, and travel expenses. 

A business loan is a contract between a bank and a business, where the business must pay back the loan, plus interest, over a set amount of time. The interest rate and repayment terms can vary depending on the business’s creditworthiness. This type of loan can also be secured, meaning it may require collateral like property or equipment. 

Government agencies, private foundations, or other organizations give business grants to businesses. These grants do not need to be repaid, which makes them more appealing to businesses looking for extra funding. They are usually used for research, development, and innovation.

How are loans and grants different? A small business loan is financing offered by a bank or financial institution to a startup or newly founded business. It is similar to regular loans with interest and repayment terms between five and ten years. However, the funds are typically used for business-related costs, such as salaries, buying equipment, purchasing inventory, paying rent, or marketing costs.

A small business grant is funding offered by the government or a private institution. Unlike a small business loan, the grant has stricter eligibility requirements, and the funds must be used for a specific purpose. For instance, a small business may only qualify for a grant if it is in the healthcare sector and the funds are being used to treat underprivileged individuals. If the small business fails to use the money for this specified purpose, then it may be required to relinquish the funds and lose the grant.

In the United States, there are more than 1,000 grant programs provided by 26 federal grant-making agencies. The programs fall into 20 categories:

If you're wondering whether you may qualify for grants, here are some of the most common options:

In the next section, we will go over a few government grants that are primarily focused on housing, energy, and rental assistance.

Home Repair Grants

The Section 504 Home Repair Program is a grant that offers funding to low-income homeowners for home repairs and improvements. Elderly low-income homeowners can also issue it.

Home repair grants help homeowners maintain their houses and keep things in tip-top shape. Some families may struggle to keep up with the repairs and issues that come with owning a home, and grants can alleviate some of that financial stress. These grants also strengthen communities and improve the local economy. 

What Are the Requirements to Qualify for a Home Repairs Grant?

To qualify for the home repairs grant, you must be:

1. The homeowner and occupant of the house
2. Unable to secure affordable credit from another institution
3. Below 50% of the area's median income
4. Above age 62 and unable to repay a repair loan (specific to elderly applicants)

Does This Program Also Provide Loans?

Yes, the Home Repair program offers both grants and loans. The loans can be used to improve or modernize homes, make repairs, and remove any safety hazards from the house.

How Much Can You Receive from Both Loans and Grants?

For a loan, you can receive a maximum of $40,000. Grants offer up to $10,000. However, they can be combined for up to $50,000 of assistance. 

How Are the Funds Used for Home Repairs?

Loans may be used to repair, upgrade, or develop homes and eliminate health and safety risks. Grants, on the other hand, must be solely used to eliminate health and safety risks.

What Are the Conditions for the Home Repair Program?

Here are the conditions for taking out a loan:

• Loans can be repaid over 20 years
• The interest rate is fixed at 1%
• You must have full title service to be qualified for loans of $7,500 or more

Here are the conditions for receiving a grant:

• Grants have a lifetime limit of $10,000
• Grants must be repaid if the property is sold or transferred in less than three years

Visit the US Department of Agriculture for more information.

Low-Income Home Energy Assistance Program (LIHEAP)

The Low-Income Home Energy Assistance Program (LIHEAP) is a program that supports qualified low-income households with their heating and cooling energy expenses. They also assist with bill payments, energy crisis assistance, weatherization, and other energy-related home repairs.

How to Apply for a Grant From the Low-Income Home Energy Assistance Program (LIHEAP)?

Before applying, you must find out if you are eligible. Eligibility depends on several factors, such as income, location, household size, and other factors. Contact your state or tribal LIHEAP office for more information.

Emergency Rental Assistance (ERA)

The emergency rental assistance program provides funds to help households that cannot pay rent or utilities due to financial hardships caused by the COVID-19 pandemic. 
 
 ERA1 payments are made to states, U.S. territories, local governments with over 200,000 residents, the Department of Hawaiian Home Lands, and Indian tribes or their designated housing entities. 

At least 90% of the funds must be used for direct financial assistance, such as rent, utilities, and related expenses. The remaining funds can be used for housing stability services. 

Who Can Receive Assistance from the ERA?

To qualify for ERA:

1. One or more individuals in the household must have qualified for unemployment benefits or experienced financial hardship due to COVID-19.
2. One or more individuals in the household experienced a reduction in household income, incurred significant costs, or experienced financial hardship due to COVID-19.
3. One or more individuals in the household must demonstrate a risk of homelessness or housing instability.
4. The household income is at or below 80% of the area’s median income.

Where Can I Find More Information on Emergency Rental Assistance (ERA)?

Read more about emergency rental assistance (ERA) at home.treasury.gov.

Temporary Assistance for Needy Families (TANF)

The Temporary Assistance for Needy Families (TANF) program provides states funding to help families in financial hardship. TANF primarily issues monthly cash support assistance to families with children. 

Additionally, the program offers childcare assistance, job preparation, and work assistance. The program is geared towards helping low-income families achieve economic self-sufficiency.

The Federal government allocates funds to states to run the TANF program.

The applicant must be a resident of the state of which they apply, a US citizen, or legal alien or qualified alien. They must also be within a certain income bracket or have very low income. 

Other requirements are listed below:

1. Applicant must have a dependent child under 18, or
2. Be pregnant, or
3. Be a minor head of household

However, states may have additional or slightly different requirements. To assess your eligibility further, visit benefits.gov for more information.

The Supplemental Nutrition Assistance Program (SNAP)

The Supplemental Nutrition Assistance Program (SNAP) is the biggest federal nutrition assistance program. SNAP grants benefits to qualified low-income individuals and families to purchase food. Eligible individuals can purchase food in authorized retail food stores through a convenient Electronic Benefits Transfer card.

Who Is Eligible for This Program?

States determine eligibility following federal guidelines that specify:

1. Income limits
2. Household size
3. Expenses

You can visit the State Directory to look at your state requirements. 

Where to Apply?

Application requests can be filed at grants.gov. You can also find useful information about SNAP or other grants through that website.

How to Choose Between a Loan and a Grant

If a grant and a loan are both options, you should always go with the grant. That’s because grants don’t require you to pay the money back.

Grants are very specific in what they can be used for, but the money is treated as a gift and does not need to be repaid. On the other hand, loans are more flexible in their use of funds but require repayment with set terms and APRs.

• Grants are ideal if you qualify and meet the specific purpose requirements, as they do not require repayment. However, they often have specific and strict eligibility requirements.
• Loans are more flexible in how they can be used. They require repayment with interest. 

Grants are better if you meet the criteria, but loans offer flexibility and broader accessibility.

Sum Up

Many people have improved the quality of their lives through grants and loans. Many private foundations, charitable organizations, and other philanthropic agencies award monetary gifts. 

Grants do not have to be repaid, making them the easier and smarter financial solution for your monetary needs. However, they are highly competitive and strict about usage. On the other hand, loans can be used for various purposes but must be repaid, and often with interest. 

When you do the research to see the differences between grants and loans, you will understand the importance of financial literacy. Ultimately, it is up to you to decide what works best for you and your financial needs.