One of the most common banking services is a loan. It comes in a variety of forms and allows you to pay for numerous types of charges. The bank usually approves a loan amount and charges you interest. The loan must be repaid in Equated Monthly Installments over the course of a set period of time. Personal loan and business loan are two of the most popular types of loans taken out by consumers.
What is a personal loan?
A personal loan is a line of credit used to make major expenditures. A personal loan is exactly what its name implies: it’s for you. It can be used to pay for anything that’s important to you. Renovations to your home, a wedding, relocating charges, emergency expenses, and more could all fall under this category.
Advantages of a personal loan
Personal and business loans differ primarily in that the former is a multipurpose loan. There are no restrictions on the usage of funds, unlike business loans or any other specialized loan such as an auto loan or a home loan.
The loan is handled fast and usually disbursed within a day, with only a few documents necessary, such as evidence of identity, income, and address. Because no collateral is required, the paperwork is minimal, and the loan is disbursed quickly. Personal loans also typically have certain basic eligibility criteria, such as a minimum monthly salary and a decent credit score.
What is a business loan?
Unsecured business loans are offered by Indian banks and non-banking financial organizations (NBFCs). The main purpose is to address an expanding company’s immediate needs. To fulfill a company’s commercial demands, most financial institutions offer term and flex loans. A business loan is often referred to as a commercial loan. Sole proprietors, privately held businesses, partnership firms, self-employed individuals, and shopkeepers are all eligible for these loans.
Advantages of business loan
The Business Loan’s most major benefit is its extremely appealing and reasonable interest rates. Lenders, similar to Personal Loans, are usually unconcerned about how the money is spent as long as it is used for commercial purposes. You have complete discretion over how you spend the funds as a borrower.
The most important feature of a business loan is that unless the lenders are investors, you are not required to share your gains with them. Banks and NBFCs are only concerned about making installments on time. The interest paid on the Business Loan is normally tax deductible up to a certain level under the Income Tax Act of 1961.
The fact that personal loans are often unsecured distinguishes them from business loans. Business loans, on the other hand, come in both secured and unsecured varieties, depending on the loan amount. If the loan amount is less than a certain amount, you may not need to pledge collateral, but if it exceeds that level, collateral may be required. Limits for secured and unsecured business loans are set by the bank, and they differ from lender to lender.
Personal Loan vs. Business Loan
The following are some of the differences between a personal loan and a business loan:
- The standards based on which the bank calculates your eligibility are a significant difference between personal and business loans. There are personal loan EMI calculator tools for the customers to calculate the EMI beforehand. When it comes to Personal Loans, lenders usually look at your debt-to-income ratio and approve the loan with minimal paperwork. You may be required to provide business plans, bank accounts, and earnings statements, among other things, when applying for a business loan. Personal credit is less important than business credit.
- When comparing personal and business loans, it’s important to remember that the former is typically an unsecured loan that doesn’t require any type of collateral. A business loan, unlike a home or a vehicle loan, requires no security. However, If the loan amount is large enough, banks may require you to mortgage your office space, factories, or other assets.
- Personal loans are not tax deductible, but the interest paid on a business loan is.
- A Personal Loan can be used for any purpose, and you are usually not required to give the lender any justification when applying for one. However, while applying for a business loan, you must be able to prove why you need the money and how you plan to put it to use in your company.
- Another distinction between a Personal Loan and a Business Loan is that the former is usually a short-term loan with repayment terms of up to five years. A business loan can be either short-term or long-term, with periods ranging from one to fifteen years.
- Personal Loans are processed and disbursed quite quickly. Before the bank can sanction and distribute the loan amount, it must go through certain processing, paperwork, and due diligence.
Advantages of opting personal loan for business
- If one is yet to start the business, it is generally preferable to opt for a personal loan. Because banks invariably tend to lean towards companies that have a positive track record. They also consider a complete set of audited financial statements going back at least 2-3 years.
- If the loan amount is large enough, in order to obtain a loan from a bank for a business purpose, collateral is required. You may not have any assets to pledge as a start-up, therefore a personal loan for business to meet your financial responsibilities may be preferable.
- A personal loan is preferable if the loan amount requested is relatively small.
- Another benefit of taking personal loans for business is that no questions regarding how the money is used will be asked. A business loan is usually approved depending on how the funds will be used. It is better suited for persons who manage firms with partners or who require significant loan amounts.
A personal loan and a business loan both offer benefits. The main goal is to cover all of the company’s expenses without losing money. When opposed to a personal loan, a business loan will provide you with more cash. If you have a large setup and need a lot of money, a business loan is the way to go, but if you only need a little money, a personal loan might be the way to go.
