Grant vs. Loan: Key Differences, Eligibility, and How to Apply (2026 Guide)

What is a Grant? Definition, Types, and How Grants Work

A grant is a form of financial assistance provided by a government, organization, or foundation to support a specific purpose. Unlike loans, grants do not require repayment, making them highly sought after for funding education, research, community initiatives, or business startups. For a deeper understanding of grants, including their types and how to apply, see our comprehensive guide: What is a Grant? Definition, Types, Eligibility & How to Apply.

Grant recipients must meet eligibility criteria, such as demonstrating financial need, aligning with the grantor’s mission, or presenting a strong project proposal. As long as the funds are used according to the grant’s terms and conditions, repayment is not expected.

For example, the Pell Grant helps low-income students pay for college, while many nonprofits receive grants to launch community programs.

What is a Loan? Definition, Types, and How Loans Work

A loan is money borrowed from a lender—such as a bank, credit union, or government agency—that must be repaid over time, usually with interest. People use loans for various needs, including education, buying a home, starting a business, or covering personal expenses.

Borrowers enter a legal agreement to repay the principal plus any interest and fees. Missing payments can lead to penalties, damaged credit, or even legal action. For instance, federal student loans help students pay for college, but repayment begins after graduation.

Loans offer flexibility in use, but the obligation to repay makes careful planning essential.

Grants vs. Loans: Key Differences Explained

The most significant difference is repayment: grants are not repaid, while loans must be paid back with interest. Grants are typically awarded based on eligibility and merit, such as academic achievement or project value.

In contrast, loans are approved based on creditworthiness and the borrower’s ability to repay. Grants often come with strict usage requirements and are highly competitive. Loans, however, offer more flexibility in how funds are spent but create a financial obligation.

For example, a business owner might apply for a grant to fund a new product launch, while another might take out a loan to expand operations.

For a detailed comparison of grants, loans, and scholarships—including key differences, eligibility, and how to apply—see our in-depth guide.

Eligibility Criteria: Who Qualifies for Grants and Loans?

Eligibility for grants depends on factors like financial need, project goals, or the applicant’s background. Some grants are reserved for students, nonprofits, or specific industries. For example, research grants may require applicants to have a certain level of education or affiliation with an institution.

Loans are generally available to anyone who meets the lender’s criteria, such as a minimum credit score, stable income, or collateral. Government loans may have additional requirements, like citizenship or enrollment in an accredited program.

Understanding these criteria helps applicants choose the right funding option for their situation. To learn more about who qualifies for grants and how to apply, check out our guide on grant eligibility criteria.

Repayment Obligations: Grants vs. Loans

Grants do not require repayment if recipients follow the grant’s terms. Misusing funds or failing to meet reporting requirements can result in the grantor demanding repayment or taking legal action.

Loans require regular payments over a set period, which include both principal and interest. Repayment schedules vary by lender and loan type. For example, student loans may offer a grace period after graduation, while business loans often require immediate monthly payments.

Missing loan payments can lead to late fees, increased interest, or negative impacts on credit scores.

Interest Rates and Fees: What to Expect

Grants do not carry interest rates or fees. The entire awarded amount is available for the recipient’s use, provided they adhere to the grant’s rules.

Loans, on the other hand, typically include interest rates and may have additional fees, such as origination or late payment charges. The total cost of a loan depends on these factors. For example, a mortgage might have a lower interest rate than a personal loan, but both will cost more than a grant.

Comparing interest rates and fees is crucial before accepting a loan.

Frequently Asked Questions (FAQs) About Grants and Loans

Q: What is the main difference between a grant and a loan?
A: Grants do not need to be repaid, while loans must be repaid with interest.

Q: Do you have to pay back a grant?
A: No, grants do not require repayment if used as intended.

Q: Are grants free money?
A: Yes, grants are considered free money, but they often have strict usage requirements.

Q: What are the repayment terms for loans?
A: Loan repayment terms vary but usually involve monthly payments over several years, including interest.

Q: Who is eligible for grants?
A: Eligibility depends on the grant’s purpose and requirements. Some are for students, nonprofits, or specific projects.

Q: Can anyone apply for a loan?
A: Most people can apply for loans, but approval depends on creditworthiness and lender criteria.

Q: Which is better for students: a grant or a loan?
A: Grants are preferable since they do not require repayment. However, not all students qualify, so loans may be necessary to cover remaining costs.

Q: Can businesses get both grants and loans?
A: Yes, some businesses use a combination of grants and loans to fund different needs. Grants can support innovation, while loans help with cash flow or expansion.