Personal Loan vs Business Loan: Which one should I choose?

There are times when you may require a large sum of money for an immediate expense, personal or professional. The ideal way to meet this urgent demand for funds is by availing yourself of a personal or business loan. However, there’s a world of difference between personal loan and business loan. You must understand how these two loans differ before choosing the right one for your needs. Let’s look at who wins the personal loan vs business loan battle.

Personal loan vs business loan

If you want to know more about the difference between personal loan and business loan, we are here to help you out. Let’s take a look at personal loans first.

Personal loan

A personal loan is a highly flexible unsecured loan that doesn’t require you to keep any security/ collateral in exchange for the loan. The bank/ financial institution doesn’t interfere in your decision of using the loan amount in any way you want. Personal loans are great for quickly fulfilling financial needs in times of need.

Personal loan features

• The application process for personal loans is easy, and usually, borrowers are informed about their status within 24 hours of applying. In some cases, loans are also approved almost instantly.
• The documentation required for applying for a personal loan is relatively standard. You only have to provide KYC documents, income proof, and ITR certificates.
• Personal loans are great for emergencies due to their fast approval and disbursal.
• A personal loan amount can range up to Rs. 25 lakh.
• Personal loans come with flexible tenors, and the borrower has the option of prepaying the loan to avoid extra interest. In the case of a foreclosure, you will have to fork out a prepayment penalty which is a small fraction of the loan amount, usually around 2% to 2.5%. You can also get a tenor relaxation if you are able to restructure your personal loan.
• Personal loans come at high-interest rates due to being short-term in nature. Personal loan interest rates usually start from 11.99% and can go up to as high as 25%.
• Primary personal loan eligibility criteria are your credit score (minimum CIBIL score of 750) and your income and repayment capability.
• You do not get any tax exemption on personal loans.

Business loan

Business loans are slightly different from personal loans; they are secured loans provided only for business-related needs. You can use the loan amount as initial business capital, to fund salaries, or to upgrade your business infrastructure. You are not allowed to utilize a business loan for personal use.

Business loan features

• The application and approval process for business loans is slightly lengthy, and banks and financial institutions usually enquire a lot before granting business loans.
• Business loans involve a lot of paperwork as banks/ institutions study all the documents carefully to ensure that they are not going to lose their investment. Individuals are required to provide documents such as:

1. Financial documents audited/ attested/ signed by a certified CA.
2. Sales tax certificate and copy of trade license.
3. Certified copy of partnership deed.
4. GST registration certificate.
5. Proof of ownership of the possessions used.
6. Proof of business existence for last five years.
7. Bank statement for last six months.
8. ITR for the previous three years.
9. Balance sheet and P&L account statement.
   

• Business loans offer tax benefits to entrepreneurs and are available at lower interest rates when compared to personal loans. They have relatively longer tenors as well. This enables you to manage your loan EMIs comfortably.
• Institutions and banks may ask you to submit business plans, account and profit statements, and regular logistical reports. This is because banks are mandated to keep a tab on your commercial assets, which are held as collateral against your business loan.
• Business loans are available in different variants such as term loans, startup loans, working capital loans, invoice financing, equipment financing and more. These are niche financial instruments for addressing specific business needs. Businesses do not always get the entire requested amount from the bank. They usually get 70% to 80% of the requested loan amount from banks.

Summary: If you face a personal loan vs business loan question, you need to figure out exactly what you need the loan for. The main difference between personal loan and business loan is the use case. While you can use a personal loan for almost anything you want, a business loan can be spent only on commercial activity. This guide will help you understand how personal loans and business loans differ from each other and decide which one is best for you.