Understand the Differences Between Business Loans and Home Loans

Home Loan and Business Loan are two distinct financial products designed to cater to specific borrowing needs. Read more to understand the difference.
Understanding the differences between business loans and home loans
2 min read
26 July 2023

When it comes to financing major ventures, two common types of loans that individuals and entrepreneurs often encounter are home loan and business loans. While both serve as means of acquiring funds, they cater to distinct purposes and have unique characteristics.

1. Purpose

Primary difference between home loans and business loans is the intended purpose.

  • Home loans also known as mortgage loans are used to finance the purchase or construction of residential properties. They offer you the means to buy your dream homes and offer long repayment options.
  • Business loans are specifically designed to support business-related expenses, such as purchasing equipment, expanding operations, financing inventory, or meeting working capital needs. These loans facilitate business growth and enable you to invest in your ventures.

2. Collateral

Collateral requirements differ significantly for home loans and business loans.

  • Home loan are typically secured by keeping your property as collateral. The purchased or constructed home serves as collateral for the loan. In the event of default, the lender has the right to seize and sell the property to recover the outstanding balance.
  • Business loans may require collateral, which serves as security for the lender in case of default. Collateral can include business assets, personal assets, or even a personal guarantee from the business owner. However, some lenders may offer secured and unsecured business loans based on the borrower's creditworthiness and business performance.

3. Eligibility criteria

Eligibility requirements for home loans and business loans vary.

  • Home loan eligibility depends on your personal credit history, income, employment stability and debt-to-income ratio. Lenders evaluate the borrower's ability to repay the loan based on your financial position.
  • Business loan: Lenders assess business loans based on factors such as the business's creditworthiness, financial statements, cash flow, business plan and the borrower's personal credit history. The focus is primarily on the viability and profitability of the business. 

4. Interest rates and repayment terms

Interest rates and repayment terms can differ significantly between home loan and business loan.

  • Home loan interest rates are generally lower than business loan rates since the property serves as collateral, reducing the lender's risk. Repayment terms for home loans are more extended, often spanning 15 to 30 years, providing borrowers with more affordable monthly payments.
  • Business loan interest rates tend to be higher compared to home loans due to the higher risk associated with business ventures. Repayment terms are typically shorter, ranging from a few months to up to 15 years, depending on your lender and the loan purpose.

5. Tax implications

Tax considerations also set home loan and business loans apart.

  • Home loans could help you avail of tax benefits. You can claim deductions under Section 80C and Section 24(b) to reduce your taxable income.
  • Business loan: Interest payments on business loans are usually tax-deductible, reducing the overall tax liability for the business. This can be a significant advantage for businesses looking to lower their taxable income. You can claim the deduction for the interest paid on a business loan under Section 36(1)(iii).

It is advisable to consult with lenders, financial advisors, or experts in the field to ensure informed decision-making and to secure the most suitable loan for individual circumstances.

Home loan or Business loan – Know the difference

 

Home Loan

Business Loan

Purpose

Purchase or construction of a home

Financing business operations or expansion

Collateral

Property being purchased or constructed

Business assets, equipment, inventory

Interest Rate

Generally lower due to secured nature

May be higher due to greater risk

Loan Amount

Depends on property value and eligibility

Depends on business needs and assessment

Repayment Term

Typically longer term (15-40 years)

Shorter term (1-10 years)

Tax Benefits

Interest paid may be tax-deductible

Interest may be tax-deductible for business

Documentation

Requires property-related documents

Requires business-related documents

Risk

Property serves as collateral

Business performance affects repayment

Usage Restriction

Intended for home-related expenses

Can be used for various business purposes

Approval Process

Often involves property appraisal

Focuses on business viability and plan

Flexibility

Limited to home-related expenditures

More flexibility in fund utilization

Impact on Credit

Impact on personal credit score

Impact on business credit score

Disclaimer

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Frequently asked questions

Business loan or Home loan which is a better option?

Choosing between a business loan and a home loan depends on your goals:

  • Business Loan: Opt for this if you're focusing on business growth, need short-term funding, and have a solid plan for returns.
  • Home Loan: If owning a home is your priority, and you value long-term stability, equity building, and potential tax benefits, a home loan is the way to go.

Consider your objectives and consult experts for personalised advice.

Can I get a home loan if I have a business loan?

Yes, it is possible to get a home loan even if you have a business loan. Lenders often consider multiple factors when assessing your eligibility for a home loan, and having a business loan is just one aspect of your overall financial situation.

Why are home loan interest rates lower than business loan rates?

Home loan interest rates are generally lower than business loan rates due to several factors. Home loans are secured by tangible collateral (the property), making them less risky for lenders. The stable and specific purpose of home loans, government incentives for home ownership, and intense market competition among banks contribute to lower interest rates. In contrast, business loans, often lacking tangible collateral and involving higher risk factors related to business operations, market conditions, and economic uncertainties, tend to have higher interest rates. The disparity reflects the varied nature of these loans and the associated risks perceived by lenders.

Can I avail tax benefits on home loans in India?

Yes, in India, you can avail tax benefits on home loans under certain conditions. The tax benefits are available under the Income Tax Act, and they primarily relate to deductions on the principal repayment and interest paid on the home loan.

Why is home loan interest rate lower than business loan rates?

Home loan interest rates are generally lower than business loan rates due to several factors. Home loans are secured by the property, providing collateral that reduces risk for lenders. The purpose and use of funds also play a role, as home loans are seen as lower-risk investments in stable assets, while business loans involve various purposes and associated risks.

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