Personal Loan vs Business Loan: All you need to know

Personal Loan vs Business Loan: All you need to know

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Find out what is the difference between Personal Loan and Business Loan in this article.

Key Takeaways

  • Personal and Business Loans are two of the most common types of Loans
  • Personal Loans can be utilised to fund various expenses like medical emergencies, wedding and vacation planning, etc.
  • Business Loans are meant to fund several aspects of business like expansion, capital infusion, buying machinery, etc.
  • Typically, Personal Loans are unsecured while Business Loans may or may not be
  • Personal loans are passed with minimal documentation but you need to provide documents for Business Loans

Introduction

A loan is one of the most popular services offered by banks. It enables you to pay for various kinds of expenses and is of several different types. Typically, the bank sanctions a loan amount and charges you interest on it. You have to repay the loan in Equated Monthly Instalments, over a stipulated tenure. Two of the most common types of loans taken by people include Personal and Business Loans. So what is the difference between Personal Loan and Business Loan? Let us find out.

What is a Personal Loan?

Whether it is something planned like a wedding or remodelling the kitchen, or an unexpected disaster like a medical emergency, a Personal Loan can save you from any such financial crisis. Personal Loans are offered by commercial banks and Non-Banking Financial Companies (NBFC). A Personal Loan becomes a viable option to cater to all your pressing needs of cash. This type of loan is also called an unsecured loan since it does not require you to mortgage your collateral with the bank.

Advantages of a Personal Loan

The primary difference between personal and business loans is that the former is a multipurpose loan. Unlike Business loans, or for that matter, any other specific loan like an auto loan, or home loan, there is no regulation on the use of cash.

This loan is often regarded as the “Jack of all trades” and can be used to fund whatever you desire, be it a vacation by the beach or that high-end gadget you have been eyeing.

With minimal documents required, such as are proof of identity, income, and address, the loan is processed quickly and usually disbursed in a day. Since there is no collateral attached, the paperwork is less, and the disbursal of the loan, seamless.  Also, Personal Loans usually have some basic eligibility parameters like minimum monthly salary and good credit score.

What is a Business Loan?

To thoroughly compare Personal Loans vs Business Loans, we need to understand the latter properly too. As the old saying goes, ‘to make money, you need some money in the first place. If you plan to start a business, a Business Loan can give you a head start to fund your expenses. If you have an established business, but you plan to upgrade the technology, inject some capital, or even hire new talents, you can opt for a Business Loan and meet your requirements.

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Advantages of a Business Loan

The most significant advantage of the Business Loan is its highly attractive and reasonable interest rates. Like with Personal Loans, lenders usually do not interfere with the loan usage, so long as the money is pumped into any business-related expenses. As a borrower, you are free to use the funds as per your requirements.

The most significant aspect of a Business Loan is that you do not have to share your profits with the lenders unless they are investors. The banks and NBFCs are concerned only with the timely payment of instalments. Under the Income Tax Act of 1961, the interest paid on the Business Loan is usually tax-deductible up to a specific limit.

A significant difference between Personal and Business Loans is that the former is typically an unsecured loan. On the other hand, business loans can be secured and unsecured, depending on the loan amount you need. Usually, you do not need to pledge collateral if the loan amount is smaller, but collateral may be required if it exceeds a specific amount. The bank determines the limits for a secured and unsecured business loans, and this limit varies from lender to lender.

Personal Loan vs Business Loan

Several factors are highlighting the difference between Personal Loan and Business Loan are as under:

  • The significant difference between personal and Business Loans is the requirements based on which the bank determines your eligibility. Lenders typically check your debt to income ratio for Personal Loans and pass the loan with minimum documentation. In the case of Business Loans, you may have to furnish business plans, bank account and profit statements, etc. The focus is more on the business credit than on the personal credit.
  • A Personal Loan can be used for any purpose, and you do not generally have to provide any explanation to the lender while obtaining it. However, in Business Loans, you need to substantiate the reasons and how you intend to utilise the money from the loan into the business.
  • While comparing personal vs business loans, it should be said that the former is usually an unsecured loan, in which no collateral is required. As for Business Loans, banks may ask you to mortgage your office spaces, factories, etc., if the loan amount is high.
  • There are no tax benefits with Personal Loans, but the interest paid on the Business Loan is tax-deductible.
  • Yet another point of difference between a Personal Loan and a Business Loan is that the former is generally a short-term loan, with repayment tenures lasting up to 5 years. A Business Loan can be a short or long-term loan, with terms lasting from 1 to 15 years.
  • Owing to its nature, the application processing and disbursal for Personal Loans is relatively quick. As for Business loans take some processing, paperwork, and due diligence on the part of the bank before it can sanction and disburse the loan amount.

Conclusion

As is apparent, there are several differences between Personal Loans and Business Loans. After a thorough comparison and understanding of the differences and similarities, you can decide which type of loan can cater to your immediate needs. Before applying for either loan, make sure you use the loan eligibility and EMI calculators to understand the loan amount you can get and the estimated EMI payable against the loan.

Download the digibank mobile app on your smartphone. Launch the app and click on the "Get Personal Loan" link on the login page

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*Disclaimer: This article is for information only. We recommend you get in touch with your income tax advisor or CA for expert advice.

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