As a business owner, sometimes there comes a time when you need some extra cash to breathe life into your venture. You may find yourself asking the question: personal loan or business loan? It is essential to understand the difference between these two types of loans and which one is best suited to your business needs.
Understanding the business environment can help you make a better decision on whether you should take a personal loan or a business loan.
Key differences between personal loan and business loan
Choosing between a personal loan and a business loan can be a critical financial decision. Each offers distinct benefits tailored to individual needs. Explore the key differences between the two loan types, including eligibility, loan amounts, repayment options, and more. Make an informed choice to meet your personal or business aspirations effectively.c
When you are planning for financial growth, having a clear understanding of entrepreneurship can be instrumental in making an informed choice.
Aspect |
Personal Loan |
Business Loan |
Loan variants |
Term Loan, Flexi Term Loan, Flexi Hybrid Loan |
Term Loan, Flexi Term Loan, Flexi Hybrid Loan |
Part-prepayment charge |
No charge on Flexi Term Loan |
No charge on Flexi Term Loan and Flexi Hybrid Loan |
Loan mount Range |
Rs. 20,000 to Rs. 55 lakh |
Rs. 2 Lakh to Rs. 80 Lakh |
Interest rate |
10% to 31% p.a. |
14% to 26% p.a. |
Repayment tenure |
12 months to 96 months |
12 months to 96 MONTHS |
Approval time |
5 minutes |
Within 48 hours of approval |
Collateral requirement |
No collateral needed |
No collateral required |
Guarantor requirement |
No guarantor required |
No guarantor needed |
Application process |
Entirely online |
End-to-end online application process |
Eligibility |
· Nationality: Indian · Age: 21 years to 80 years* · Employed with: Public, private, or MNC. · CIBIL Score: 685 or higher · Monthly salary: Starting Rs. 25,001, based on the city you live in |
· Nationality: Indian · Business vintage: At least 3 years · CIBIL Score: 685 or higher · Work status: Self-employed · Age: 18 to 80 |
Documents required |
· KYC documents: Aadhaar/ PAN card/ passport/ voter’s ID/ driving license/ Letter of National Population Register · Employee ID card · Salary slips of the last 3 months · Bank account statements of the previous 3 months |
· KYC documents - Aadhaar/ PAN card/ passport/ voter’s ID
|
Purpose
The primary difference between a personal loan and a business loan is the purpose for which you take them. A personal loan helps meet the personal financial requirements of an individual, such as paying off medical bills, or buying a car. A business loan helps to finance business operations or expansion, purchase inventory, equipment or to bridge cash flow gaps.
A sound grasp of working capital is crucial when considering a business loan to fund your operations or manage growth effectively.
Collateral
When it comes to collateral, personal loans are generally unsecured and require no collateral. Lenders evaluate the borrower's credit score, income and employment background to decide whether they qualify for a loan. For business loans, especially when large sums are required, understanding your working capital cycle can help in ensuring you meet the lender's criteria without putting your assets at risk.
Business loans can be of two types – secured and unsecured. Secured loans require collateral to secure the loan. You can get unsecured loans without collateral, but they may have a higher interest rate.
Loan amount
The loan amount for personal loans is usually lower than for business loans. Personal loans have a maximum limit that is dependent on the borrower's credit score, income and other factors. Business loans can vary depending on the type of funding, but the amounts are usually higher. The loan value may depend on the business size, collateral, income and credit score. With business loans, particularly those requiring larger amounts, collateral may be required. Knowing your working capital cycle can help you determine how much collateral may be necessary for securing the loan.
Interest rates
Interest rates for unsecured personal and business loans may be higher than those of secured business loans, since there is no collateral in case of the former. The lender bears a higher risk with unsecured loans, which shows in the higher interest rate. Secured business loans may have a lower interest rate as they require you to pledge assets for the loan amount.
Loan term
Personal loans generally have a shorter term than business loans. Personal loan terms typically range up to 96 months. Business loan terms can go up to 180 months if you opt for a secured loan. These longer tenures provide businesses with more flexibility in repaying the loan amount.
Choosing between a personal or business loan depends on what you need the loan for. If you need funds to cover personal expenses, then a personal loan may be the right choice. Still, if you are looking to finance business operations or expansion, then a business loan is the way to go.
Remember, personal loans usually have a higher interest rate and carry no collateral requirements. Business loans can have lower interest rates and longer terms if the loan requires collateral. By evaluating your financial goals and determining what is best for your business needs, you can make a more informed decision on which loan type is suitable for you.
