Loans provide support during financial crises, help with emergency treatments, and much more. Sometimes, small and medium-scale businesses can take a loan for their growth. If you require a loan, you have two options. These are personal loans and business loans.
Every person must understand the differences between these loan types. This will prevent from things going wrong. For instance, you might take a personal loan for your business when you don’t require it. Similarly, the consequences won’t be good if you choose a professional loan for personal purposes.
So, to help you understand, we have listed the details of business and personal loans. This will help you understand the fundamentals of these credit types excellently.
What is a personal loan? What is a business loan?
Both business and personal loans are different credit types. They differ in terms of usage. You can apply for a personal loan when you require funds for personal use. For example, your wedding expenses have crossed the budget. You can opt for a wedding personal loan to meet the funds shortage. Similarly for medical emergencies. It helps solve fund emergencies or shortages for private use.
On the contrary, creditors grant business loans to businesses and companies. It can be due to many reasons, like:
- Getting new stocks for the business
- Kickstarting the business
- Expansion of the business location
- Building the new infrastructure
- Paying off business debts
Creditors grant the personal loan to the applicant’s name. But when it comes to the business loan, creditors do so for the applicant’s and the business’s name.
Features of personal loan
- A personal loan doesn’t require any fees. For instance, if you prepay the debt amount, you won’t get charged for the same. Similarly, most creditors do not charge any processing fee when you apply for a loan.
- Sometimes, creditors offer discounts based on different situations. For instance, they can give you a discount for an automatic payment method. Similarly, you can enjoy a rebate if you pay an additional month to clear the debt faster. This is one of the best features of a personal loan.
- Personal loans do not require too many documents and proofs. You must submit income proof (salaried employees), ID proof, and credit report. If you do not have a good score, go for secured loans.
- Most creditors offer payment flexibility for personal loans. It means you can extend the repayment term based on your convenience. Furthermore, if you cannot pay the debt on time, you can easily foreclose the personal loan.
- Almost all creditors offer personal loans. You won’t have to search a lot to get in touch with the creditor.
Features of business loan
- Most business loans do not require any collateral. It means you won’t have to keep any asset as the mortgage.
- Business loans are risk-proof. You won’t have to worry much about suffering from any risk, like a poor credit report.
- You can ask for a higher principal amount with the business loan. This is because the creditor grants the loan to a commercial entity.
- Business loans also come with flexible repayment terms. Moreover, you can extend the repayment term if you cannot pay EMIs on time.
- You won’t have to submit a credit report for the business loan. But yes, you do require to submit business earnings, capital investment, and tax reports.
Pros and cons of personal loan
- A personal loan helps grow the credit score with on-time EMI payments.
- The documentation process is less intense. You only have to submit income documents, a credit report, and ID proof.
- Personal loan offers an excellent opportunity for debt consolidation.
- You can use a personal loan for almost anything without any explanation.
- The principal amount can be as low as possible for lower interest.
- Security on a personal loan can create problems.
- It depends on your credit score. In addition, a lower score can lead to application rejection.
- Personal loans involve several penalties, like late payment interest charges.
Pros and cons of business loan
- You can use the funds flexibly according to business requirements. There are no hard and fast rules.
- Usually, the sum assured for business loans is higher. You can ask for INR 50,00,000 and more as the capital for the credit.
- The interest rates are usually low for business loans.
- Repayment terms are flexible. Therefore, you can adjust the total time for debt repayment at your convenience.
- The funding process is slow and takes approximately weeks.
- You have to go through an intensive application process.
- Most creditors keep eligibility criteria quite strict.
Personal loan VS business loan: A parallel study
|You can get flexibility for the personal loan principal amount. Moreover, you cannot expect it to be much higher.
|Often, creditors offer higher principal amounts for business loans. You can get the exact amount of credit that you require.
|Repayment terms are more flexible.
|Business loans have flexible repayment terms. But it is mostly for startups and small-scale businesses.
|You can get a personal loan for any purpose. For instance, you can take it for weddings, education, medical emergencies, and more.
|Business loans are strictly for business purposes. For instance, you can expand the business location with the same. You can also get new stock for inventory.
|Although rebates will be there, the interest rates are usually high.
|For business loans, you will get flexible interest rates. Additionally, you can lower the same by increasing the capital amount from your pocket.
|Personal loans involve higher risks. But you can reduce the same with security.
|You don’t have to give security for a business loan. However, that might increase the risks.
|An easy documentation process makes a personal loan more feasible. You only need to give three to four documents.
|Business loans involve more documentation. You need to submit documents in the name of your business.
In this article, we have explored the differences between business and personal loans. Additionally, we have also learned about the features of the loan types and their pros and cons. If you want to know more about a personal loan or business loan, you can read the online materials on Piramal Finance.