Personal Loan vs Business Loan – Which One Should You Apply For?
Comparing personal loan vs business loan could help business owners be self-reliant. But which one is best depends on the needs. You must take into account that personal loans and small business loans have different purposes and different eligibility criteria. It also has a different impact on your credit score. Read on to learn more about personal loans and business loans before opting for one.
What is a Personal Loan?
With a personal loan, you can borrow money to pay your expenses and repay those funds over time. A personal loan is a type of instalment debt that allows you to get a lump sum loan. For example, you can use a personal loan to cover the following:
- Moving costs
- Debt consolidation
- Medical bills
- Wedding expenses
- Home remodelling and repair
- Funeral expenses
- Holiday expenses
These loans differ from other loans used to fund certain costs, such as student loans, car loans, and mortgages. For personal loans, there is usually a fixed repayment date for the loan. On the other hand, personal credit lines can be open and available to you indefinitely, as long as your account is in good condition with your lender.
Advantages of a Personal Loan
1. Prompt Approval
Personal loans take less than three to four weeks to process. Therefore, they are the best choice to meet your urgent cash and payment needs. If your credit history is strong, the lender will successfully approve your personal loan application.
2. No Security Required
Personal loans are unsecured. That is, you do not need to provide collateral to take advantage of them. For this reason, it is easier to take a personal loan than other loans such as mortgages and car loans.
3. No End-Usage Restrictions
Personal loans are useful without limited use cases, such as buying an iPhone, vacationing in Switzerland, or home remodelling. In addition, a single loan can be used for multiple purposes and is not restricted. This flexibility is the main reason why personal loans are so famous today.
4. Build Credit
If you have low credit or are unfamiliar with credit, you can improve your credit score by taking affordable personal loans and paying them off on time. Paying EMI on time with a pre-determined interest rate will increase your credit score. However, it is important to withdraw the loan amount within the repayment capacity. Otherwise, without EMI payments, your credit score can be adversely affected.
Disadvantages of a Personal Loan
1. High Fees
Most lenders charge a fixed percentage of the loan amount. This fee is usually higher than the fee for a secured loan. In other words, the borrower will receive less than requested.
2. High-Interest Rates
Interest rates on personal loans are on the high side, primarily due to the fact that they are unsecured. This can make it more difficult to repay a loan for people who do not have enough money.
3. Strict Eligibility Criteria
Lenders follow strict guidelines regarding eligibility criteria for personal loans. Most lenders expect a particular level of income before considering an application. In addition to income, the applicant’s creditworthiness is also tested, but the application may be rejected due to poor grades.
4. Repayment Rigidity
Borrowers have the flexibility to choose a repayment period, but most lenders do not allow changes to the repayment period once selected. This means you can’t repay the loan early or choose to pay in instalments, but you have to pay the required amount over the entire period.
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What is a Business Loan?
The financial assistance provided by a lender to a company is a business loan. Different types of business loans are available on the market to meet the different needs of your business. Some of the most popular are:
- Short-term loan
- Credit line
- Equipment loan
- Merchant Cash Advance
- Overdraft facility
- Working capital loan
All companies, including retailers, sole traders, private or public companies, and partnerships, are eligible to apply for a business loan. However, you need to use that amount to run your business and grow. For example, some acceptable ends for business loans are inventory purchases, working capital needs, storage needs, and hiring new employees.
Advantages of a Business Loan
1. Fast Payments
Banks pay their business loans quickly, so you don’t have to worry about running out of funds or delaying your growth plans. For example, some lenders pay a certain amount of a business loan to a particular priority category customer within 48 hours under a business growth loan.
2. Minimal Documentation
One of the benefits of business loans is that you don’t need a lot of paperwork to get them. Some customers can get a loan with collateral and a guarantor to meet all needs, from expansion to working capital needs. You can also get front door services from some lending institutions.
3. Competitive Interest Rates
Due to the sophistication of banks, the interest rates on business loans are very low, and you can get a business loan without worrying about high repayments. Of course, the interest rates charged by banks vary from customer to customer, depending on the customer’s creditworthiness, duration, and purpose for which the business loan is required.
4. Flexible Terms
You have the option to choose the duration of your loan. If you want to take out a business loan in a short period to cover your working capital, you can take out a one-year loan. If you want to expand your business, you can opt for a longer period.
Disadvantages of a Business Loan
1. Difficult to Qualify
Getting a business loan is very difficult unless you are a small business owner with a significant track record of valuable assets. As with applying for a mortgage, banks pay particular attention to lending. You want to make sure you can repay them. In many cases, the borrower will need to provide the bank with some form of guarantee.
2. High Interest Rates
Another drawback of business loans is high-interest rates. In addition, the amount of money a company is eligible for is often not enough to meet the needs of the company. Borrowing money at high-interest rates is disadvantageous to the business as it often requires processing business loans and additional funds to cover the funds not provided by the bank.
Difference Between Business Loan and Personal Loan
| Personal loan | Business loan | |
| Use | Personal use | Commercial use |
| Interest rate | 9.9% onwards | 16% onwards |
| Collateral | Does not require collateral or security | Collateral and guarantee are required to apply |
| Loan tenure | 3-72 months | Same as personal loans. However, few institutions offer loans for up to seven years. |
| Documents required | Identity Proof: Driving Licence, Passport, Voters IDResidence Proof:- Licence Agreement / Utility Bill / Passport (any one).three3 months’ latest Bank StatementSalary slips for the previous three months. | Identity Proof Address Proof (Driving Licence, Voter ID, Passport)Last six months’ bank statement.Last two years of income documents.Proof of continuation (ITR, Sales Tax Certificate) |
| Eligibility | Self-employed entrepreneurs and salaried individuals between 21 – 60 years | Self-employed with a CIBIL score of 685 or higher, having 24 – 70 years of age |
| Tax deduction | Nontaxable | The interest component is tax-deductible |
Final Word
Business loans are a good option if you are an established business requiring significant money to grow your business. You can borrow at a relatively low-interest rate, choose a longer period and enjoy tax incentives. However, ensure you can provide the asset as collateral for the loan. On the other hand, if you are just starting out and need a relatively small loan amount in a short period, choose a personal loan. These loans are unsecured and are suitable for start-ups that cannot provide assets as collateral. But know that the interest rate will be considerably greater than for a company loan.
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FAQs on Personal Loan vs Business Loan
Ans: Pre-closure means that the client wants to close all unpaid principals at once. Partial payment means that the customer wants to repay only a specific portion of the unpaid amount.
Ans: Some lenders have a lockup period of 6 months to 1 year, but some banks can be closed in advance even after the first EMI has been withdrawn from the bank. In addition, institutions may allow free pre-payment or charge a prepayment fee.
Ans: Security promised the bank to take out a loan. The higher the value of security, the greater the benefits. This will allow banks to offer more credit and lower risk.
