Tips & Advice

Personal Loan Vs Business Loan Which Is Better

Business Finance

What is a Personal Loan?

A personal loan in simple language is an easy to obtain all-purpose loan. Unlike a business loan, a personal loan has flexible end-use and is not restricted to business-related expenses only. It is an unsecured loan that can be used for a variety of reasons without any collateral provided as security against it. Whether it is a medical emergency, a long vacation, a wedding, or funds needed for a business, a personal loan can help you with the required capital to deal with these unexpected as well as planned expenses. A personal loan is an instant approval loan that requires minimal documentation and can be availed by an individual to meet personal and business needs.

What is a Business Loan?

A business loan or a commercial loan can be secured or unsecured in nature. The loan amount sanctioned under a business loan can only be used for business-related expenses. A business loan funds various aspects of business such as expanding your existing business, addressing the cash flow issues, buying or upgrading machinery, or renovating your place of business. Several business loans are available in the market and can aid in fulfilling the capital requirements of a business owner.

Personal Loan Vs Business Loan

  • Loan Approval ProcessA loan approval process for a personal loan is much easier and quicker as compared to a business loan. If you are a business applying for a personal loan, you need to ensure an adequate debt-to-income ratio. If you are an individual with a good credit score and a steady flow of income, a personal loan can be approved and disbursed within a day.
    However, the business loan application and review process can be time-consuming as you may have to furnish a lot of documentation to the lender. In the case of a business loan, the primary focus is on the business instead of the individual applying for the loan. If you have just started your business you might find it a bit difficult to get a business loan. So when it comes to the loan approval process, the personal loan has an upper hand because of the ease with which one can get it.
  • Interest RateA personal loan as the name suggests is primarily designed to meet your fund requirements arising from personal needs such as a medical emergency, home renovation, wedding, etc. Since there is no mortgage as collateral with the lender for a personal loan, the interest rates are higher as compared to a business loan. A personal loan for a business might not be an ideal choice because the higher interest rates can impact the business’ cash flow. Hence, if the purpose of the loan is to meet the business expenses, it is prudent to prefer a business loan over a personal loan.
  • Tax BenefitsInterest paid for a business loan is tax-deductible in India as per the Income Tax Act of 1961. There is no tax exemption or tax deduction for a personal loan.
  • Funds UsageA personal loan is a multipurpose loan without any restriction from a lender on the usage of the loan amount. However, a business loan is strictly limited to cater the business expenses. For a business loan, a borrower has to substantiate the reasons before the loan approval as to how and where they intend to use the loan capital.
  • Loan TenureA personal loan is a short-term loan where the loan is offered for a maximum of 5 years by the lender. On the other hand, a business loan can be both short-term and long-term depending upon the fund requirements and repayment capability of the borrower.

Bottom Line

At the end of the day, choosing between a personal loan and a business loan is dependent on the requirement of the borrower. If the motive is to meet the business expenses then a business loan with its benefits of lower interest rate, higher loan amount, and tax benefits makes more sense. But if you are in urgent need of capital to meet your fund requirements that go beyond business expenses, a personal loan with an easy application process and instant approval would be a good option for you.