Personal Loan vs. Business Loan: 7 Key Differences You Should Know

Personal loans and business loans each serve a different financial purpose. Depending upon your financial requirement, you can opt for the type of loan that best suits you. Understanding the key differences between both will help you to make the best choice.
This blog explores key differences between personal loans and business loans, and the best option for your financial goals.
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ToggleWhat is a Personal Loan?
The Personal loan is usually an unsecured loan offered by a bank or a financial institution based on criteria like employment history, income source, credit score and repayment capacity. A personal loan can be used for various personal requirements like medical expenses, wedding costs, home renovation, travel and so on.
What is a Business Loan?
A business loan is specifically designed to cater to business requirements that cover the costs of running and growing the business. This includes expanding the business, marketing, equipment purchases etc. Whether you’re looking to grow your business or manage immediate expenses, a business loan also provides the funds needed to keep things running smoothly.
7 Key Differences Between Personal and Business Loans
Not sure which loan suits your needs? Here are 7 key differences between personal and business loans to help you decide the best option for your financial goals:
Factor | Personal Loan | Business Loan |
Purpose | Personal loans are offered for personal expenses like home renovation, travel, medical expenses etc. | Business loans are given for business-related expenses like working capital, equipment, marketing etc. |
Eligibility | Depends on age, income, credit score, monthly income | Based on business performance, revenue, and credit. |
Loan Amount | Personal loans are usually offered for a lower amount. | Business loans are larger amounts depending on business needs. |
Interest Rate | Interest rate is higher as the risk is greater. | Interest rates are usually lower, especially with collateral or established businesses. |
Repayment Terms | Repayment is flexible, with monthly fixed instalments. | Repayment is structured based on business cash flow. |
Tax Benefits | Tax benefits on personal loans are limited. | Tax is deductible as interest on a loan taken by a business can be shown as a business expense. |
Collateral | Personal loans are usually unsecured, though some loans may require it. | Business loans are secured with business assets or personal guarantee. |
Pros and Cons of Personal Loans
When considering a personal loan, it’s important to weigh both the advantages and potential drawbacks. Let’s take a closer look at the pros and cons to help you make an informed decision.
Pros of Personal Loans
- Varied Purpose: Personal loans can be used for any type of personal financial requirements like medical bills, travel costs, weddings and so on.
- Quick Disbursal: Personal loan apps like Zype have a quick application process and fast disbursal of loans.
- Hassle-free Process: The documentation is simple and digital with no collateral required.
- No Collateral Required: Personal loans are typically unsecured, meaning you don’t have to pledge any assets (like your home or car) as collateral, reducing the risk for borrowers.
- Boosts Credit Score: Timely repayment of a personal loan can improve your credit score, which may help you qualify for better loan terms in the future.
Cons of Personal Loans
- High Interest Rate: Personal loans may have a high interest rate, since they need to cover the risk of giving an unsecured loan.
- Impact on Credit Score: If you miss payments or default on your loan, it can negatively affect your credit score, making it harder to secure loans in the future.
- Risk of Over-Borrowing: Since personal loans are often unsecured and relatively easy to obtain, there’s a temptation to borrow more than necessary, leading to potential financial strain down the line.
- No Asset as Security: Because personal loans are unsecured, you don’t have any assets backing the loan. In case of non-payment, it can result in severe financial consequences, such as legal actions.
- High Loan-to-Value (LTV) Ratio: Since personal loans are unsecured, they typically have a lower loan-to-value ratio, meaning you can only borrow a smaller amount compared to secured loans.
Pros and Cons of Business Loans
Pros of Business Loans
- Flexible Interest Rate: If you own a business and have a good credit score, you are likely to get a loan at favorable interest rates.
- Tax Benefit: The interest you pay on a business loan is deductible from the taxable income.
- Large Amount: As a business owner and based on your profile, you can get a loan for a large amount.
Cons of Business Loans
- Long Application Process: Business loans have a tedious application with a lot of paperwork for loan approval.
- Not Suitable for Startups: Many lenders require the business to be running profitably for 2 – 3 years for them to approve the loan. If your business is just established, it might be difficult to get a business loan.
- Collateral Requirement: Many business loans are secured, meaning you may need to pledge assets, such as your property or equipment, to qualify. This increases the risk of losing valuable assets if the loan isn’t repaid.
When to Choose a Personal Loan
Unsure if a personal loan is the right choice? Here’s our guide to help you decide the top reasons to consider taking a personal loan for your financial needs.
- Medical Emergency: You may face an unexpected medical issue and require quick access to funds to cover the cost of treatment. A personal loan is a good option to cover the cost of medical bills.
- Debt Consolidation: If you have multiple loans that require to be paid, such as credit card bills or high-interest loans, you can opt for debt consolidation to merge all the debts into one single loan. This makes the repayment simpler and lowers the interest rate, thereby reducing your financial burden.
- Home Renovation: If you want to do a house repair or set up a new kitchen, you can opt for a personal loan to cover the cost.
- Wedding Expense: Weddings can be expensive, but a personal loan is a smart way to cover costs like catering, decorations, and other expenses, helping to ease the financial burden of your special day.
- Travel Costs: When you plan a trip or a holiday, the cost of the trip including accommodation, flight tickets, shopping, and adventure activities, adds up significantly. You can opt for a personal loan to cover these travel costs.
When to Opt for a Business Loan
Debating when the right time is to get a loan for your business? We have stated reasons when it is a good option to get a business loan:
- More working capital: If you require more working capital to expand your business, it is a good idea to opt for a business loan. If your business is established for 2-3 years and is profitable, you can get a loan at an affordable interest rate with a flexible repayment option.
- Buying equipment: For a product-based business, securing funds to purchase inventory or equipment is essential. In such cases, a business loan can be an excellent option to meet these financial needs.
- Marketing costs: You may require funds to promote your product or services or run a campaign during the festive season. Getting a business loan to cover that cost will help you manage it cost-effectively.
Also Read: Why Should You Consider a Personal Loan for Business Use?
How to Decide: Personal Loan or Business Loan?
Personal loans are generally taken for short-term goals while business goals are for long- term goals. You need to evaluate your financial requirements to understand which type of loan is best suited for you. Keep in mind that personal loans have a higher interest rate and require no collateral. Business loans typically offer lower interest rates and flexible repayment tenures but often require collateral or a profitable business to qualify.
Eligibility Criteria Comparison: Personal vs Business Loans
The common eligibility criteria for personal loans and business loans are stated as below:
Factor | Personal Loan | Business Loan |
Purpose | Personal loans are taken for various personal expenses like weddings, travel or home renovation. | Business loans are taken when the business owner wants expansion or needs to purchase equipment. |
Credit Score | One needs to have a high credit score (700 and above) | A good personal credit score or business credit is required. |
Collateral | Collateral is typically not required. | Collateral is required for a large amount or a longer loan term. |
Income Requirement | The borrower must have a steady income source or must be salaried. | The business must be established and profitable for a few years to be eligible. |
Documentation | One required minimal document like Aadhar and PAN card | An extensive list of documents is required that includes business plan, strategy, financial records, GST fillings etc |
Frequently Asked Questions
Can I Use A Personal Loan For Business Purposes?
Yes, you can utilize the funds from a personal loan for business purposes. However, it is advisable to apply for a dedicated business loan as it is designed for business expenses and may offer better terms.
What Are The Interest Rate Differences Between Personal And Business Loans?
Personal loan interest rate ranges between 10% – 31% p.a and business loan interest rate ranges between 9.75% – 26% p.a.
Which Loan Type Has Easier Approval Criteria: Personal Or Business?
Personal loans are easier to get approval as compared to business loans as they don’t require any collateral. For a business loan, lenders look for a solid business plan that includes market analysis, financial projections and strategy.
Are There Tax Benefits For Personal And Business Loans?
Yes, there are tax benefits for personal and business loans.
- Personal Loans: Tax benefits are available if used for home-related purposes or investments.
- Business Loans: Interest on business loans is tax-deductible, but the principal repayment isn’t.
How Does Repayment Flexibility Differ For Personal Vs Business Loans?
Personal loans typically offer more flexible repayment terms, while business loans may have stricter repayment schedules based on cash flow and business performance.
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