What Is a Grant vs a Loan?

When you’re starting a small business or you need to cover a big expense, such as a home repair or college tuition, but you don’t have money on hand, you might apply for a grant or a loan. Grants and loans are both forms of financial assistance that you typically receive as a lump sum. But the money you get from a grant is generally yours to keep, while you will have to pay back a loan including interest (the cost of borrowing) and any fees.

Let’s break down some common types of grants and loans and how you may be able to use each.

What is a grant?

A grant is a type of financial assistance that doesn’t need to be repaid. Institutions such as non-profit organizations, universities and government agencies offer grants to serve a specific purpose. For example, some grants may be intended to benefit individuals from a specific community, such as first-generation college students. Or they may fund organizations that support a public good. When a person, business or organization applies for a grant, they usually have to outline how they plan to use the money for that specific purpose.

Types of grants

Some common types of grants include:

• Educational grants: help people cover tuition for college or other higher education
• Research grants: cover expenses like travel, materials, facilities and staff for individuals engaged in valuable research
• Small business grants: help small businesses launch, grow and create jobs
• Creative grants: enable artists to work on specific projects in writing, visual arts, theater, music or other forms of art
• Housing grants: help people who meet certain criteria make their homes safe and habitable or help them find a safe place to live

Many grants for individuals are need-based. For example, the federal government awards Pell Grants to students with financial need, so they may more easily afford to attend college. To qualify you must “display exceptional financial need” and not yet have a college degree.¹

How to get a grant

The process for getting a grant depends on the type of grant funding you need.

1. Identify your specific need. To narrow down your grant search, try to determine the specific expenses you need additional funding for. For example, maybe you’re entering college and you need help with tuition. Or maybe you’re a working artist and need funds to support an upcoming project. Knowing what type of grant you need gives you the direction to get started.
2. Find a grant opportunity. You might use different tools to track down grant funding, depending on your circumstances. For high school students looking to fund their college education, a guidance counselor may be a good place to start. You could also use platforms like grants.gov or GrantStation to find many types of individual grants.
3. Apply. To receive a grant, you often have to submit an application that shows you meet the requirements. The application may include personal information (such as your name and birthday), information about your background (such as proof of your income level or military service), essays, recommendation letters and other types of documents. Research grant applications may also require a detailed proposal that explains the project’s methods and objectives and shows how you’ll use the funds.²
4. Wait for approval and fund disbursement. Funding cycles may vary across different types of grants. You may not receive a response right away. And even if you’re approved, it may take weeks or months to receive the money.³ Before you apply for a grant, consider the urgency of your funding need.
5. Use the funds as intended. If you receive grant funding, you must use the money for the purpose outlined in the application. You may have to pay the grant back if you use it for any other reason or if you don’t fulfill a commitment you made in the application. For instance, if you get an educational grant and you leave school, you might have to repay the grant amount.⁴

When to consider a grant

Grant funding isn’t available for every kind of expense, but it’s generally smart to consider grant options before applying for a loan. You may be able to receive grant funding in some circumstances including the following:

• You meet program-based eligibility requirements. Grant programs often focus on specific groups of people. If you fall into one of the groups a grant program serves, such as veterans, for example, you may want to consider grant options.
• You're exploring non-repayable assistance before borrowing. It generally makes sense to seek out grant options for an expense first before taking on debt. Many people use this approach to fund college.
• You're pursuing a specific cause or goal supported by grant programs. If you need money to achieve a specific goal, you may want to seek grant funding from organizations that align with your goal. For example, if you’re working on a public art project, you might look for grants from an arts organization.

Finding the right grant for a specific need may take a lot of research. Grant funding is often highly competitive, since grant makers usually have limited money to offer.⁵

If you’re interested in a grant, pay close attention to the requirements and complete the application with care to improve your odds. Some funders accept applications on a rolling basis, but others have strict deadlines.

What is a loan?

A loan is a sum of money that you borrow and must pay back, usually with interest. You might get a loan from an individual, such as a friend or family member, but typically loans come from lenders, banks or credit unions. OneMain, for example, offers personal loans from $1,500 to $30,000.^†

Unlike a grant, a loan is a form of credit. Student loans have their own qualifications and application processes, which are different from those for personal loans. You can learn more about student loans at studentaid.gov.

Repayment terms can vary depending on your loan type and lender. But typically, you pay loans such as mortgages, personal loans, auto loans and student loans back in fixed, regular payments or installments, over a set period.

Lenders may offer you a secured or unsecured loan. Secured loans are backed with something of value that you possess, such as a vehicle, called collateral. If you fall behind on your secured loan payments, the lender has the right to take possession of your collateral and sell it to make up for the money they’ve lost.

A secured loan could help you boost your borrowing power, so you may be able to borrow more money and get more favorable terms than you would with an unsecured loan, particularly if you have less-than-ideal credit.

Unsecured loans don’t require collateral. Instead, you’ll qualify based on factors such as your credit score, credit history and income.

Types of loans

Loans have many potential uses. Some loans can be used for flexible needs. For example, you could take out a personal loan to cover an emergency expense or pay for a vacation. But other types of loans serve more specific purposes.

Some common types of loans may include:

• Personal loans: loans you can use for a wide variety of purposes, from home repairs to debt consolidation
• Mortgages: home loans that help you purchase a home or refinance an existing home loan
• Auto loans: loans used to purchase new or used vehicles
• Student loans: loans used to finance higher education costs, such as tuition, books and living expenses

When to consider a loan

You might consider applying for a loan in the following circumstances:

• You don’t qualify for a grant. Grants have strict eligibility requirements. If you can’t find a grant that fits your needs, a loan may be a better choice.
• A grant won’t cover your needs. Maybe you’ve already gotten grant funding for an expense such as an emergency home repair, but the money you received doesn’t quite pay for everything. A loan could cover the difference.
• You need money quickly. Even if you’re awarded a grant, you may have to wait weeks or months to get the funds. The turnaround time for a loan may be quicker, depending on the type of loan, the lender and your financial situation.
• You want predictable payment terms. Loans offer predictable payment terms that can make them easier to budget for than some other types of credit. Just make sure you can manage your repayment obligations before signing a loan.

Grant vs loan

	Grants	Loans
Repayment	Don’t require repayment	Require repayment with interest
Eligibility	May have need-based or other eligibility requirements	Typically have credit score, income or debt-to-income ratio requirements
Sources	May come from universities, government agencies, organizations or private companies	Come from lenders, banks or credit unions
Purpose	May only be used for specified purposes	Can be used for any purpose that’s permitted in the loan agreement documents
Collateral	Don’t require collateral	May require collateral

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Know the funding options that fit your goals

Whether you apply for a grant or a loan depends on your needs and priorities. If your goal aligns with a grant funder’s priorities and you meet eligibility requirements, you may want to apply for one of their grants. If you’re looking for more flexible funding or you need money quickly, and you’re prepared to repay the money with interest, a loan might be a better fit. With a lender like OneMain, you could get a personal loan in as little as one day.^¶ Then, you can pay it back over time with predictable monthly payments that fit your budget.

In some cases, you might even use both grants and loans. A financial advisor may help you understand your options and create a plan to help you reach your goals.

Sources

1.www.studentaid.gov/understand-aid/types/grants/pell
2.https://catalyst.harvard.edu/writing-communication-center/get-funded/write-your-grant-proposal/
3, 5.https://www.usgrants.org/personal-grants.htm
4.https://www.grantwatch.com/grantnews/who-pays-for-grants-and-do-you-have-to-pay-them-back/