Difference between Personal Loan vs Business Loan

In today's dynamic financial landscape, the availability of capital has increased significantly. The market is teeming with various personal and business loan options, reflecting the increasing affordability of capital. However, navigating the choice between a business loan and Personal Loan is no simple task, as the decision is often nuanced. Let us understand each category and gather a deep understanding of personal loan vs business loan. 

What is a Business Loan?

A business loan is a financial tool designed to fund a business's operations or expansion related requirements. Business owners can use this form of financial support for capital investments, covering operational costs, and fulfilling working capital needs. 

Business loans are generally offered by banks and NBFCs, who provide loan approvals online and offline. During the approval process, lenders consider the business's financial status and check a company's revenue and existing debts. If you are taking a business loan, you may also need to describe how you plan to use the loan funds.

Once the loan is approved, the lender disburses the loan amount as a lump sum, and interest starts accruing on the total outstanding balance. The speed at which funds are made available can vary, but in some cases, the money can be accessible as soon as the following business day following approval and verification. 

Advantages of Business Loan

Here are the top benefits of taking a business loan: 

Profit retention

If you bring an investor on board, they might expect a share of your business profit. A business loan does not require you to share profits. With a business loan, you repay a fixed sum to the lender, consisting of the principal and interest, regardless of how well your business performs with the financial support.

Support for working capital

Business loan funds can be used to bolster your working capital, which can be invaluable during liquidity shortages. This allows you to sustain day-to-day operations and cover short-term expenses without depleting your emergency fund.

Enhanced business credit

Obtaining a business loan can contribute to improving your business's creditworthiness. However, timely repayments and adherence to the loan's terms are essential to enhance your business's credit score. This improved credit score helps secure future financing with lower business loan interest rates.

Tax benefits

Interest paid on a business loan is tax-deductible. You can categorise your interest payments as an expense, making you eligible for tax deductions. According to the Income Tax Act of India, you can claim a deduction for the interest paid on business loans funded from your business profits.

What is a Personal Loan?

A personal loan is a financial tool that allows you to borrow funds from banks or financial institutions for your expenses. These expenses can range from medical bills and home improvements to weddings and vacations.

You can obtain personal loans without the need for collateral or security. Banks and financial institutions typically prefer extending personal loan to salaried individuals as they have a more predictable and reliable income.

To secure a personal loan, you have to provide documents regarding your age, address, identity, and income. The application process is usually smoother compared to business loans, resulting in quicker approval times. Once approved, the loan amount will be disbursed to you in a single lump sum and may be available on the same day your information is verified.

Advantages of Personal Loan

 

Streamlined documentation

One of the benefits of a personal loan is the zero to minimal documentation requirement. When you apply online, all the documentation is handled digitally. You can upload the necessary documents or verify a few details online, making the process paperless. 

Some lenders even offer doorstep document collection, if required. You may need to provide proof of age, address, bank account details, salary slips, income tax returns, and credit history.

Swift disbursement

Personal loans are known for a quick turnaround time. It can be approved and disbursed within 1 to 4 working days, making it an ideal option for addressing urgent financial needs. 

Debt consolidation assistance

If you have outstanding debt like secured loans or high-interest credit card balances, you can use a personal loan to pay off these dues and simplify your financial portfolio. Personal loans offer lower interest rates than credit cards, making them a cost-effective option for debt consolidation.

Flexible repayment tenure

The loan tenure generally ranges from 12 months to up to 7 years, allowing you to select a duration that aligns with your financial situation and needs. Opting for a longer tenure results in lower EMIs, giving you the flexibility to manage your monthly expenses effectively.

Competitive interest rates

Personal loans are available at competitive interest rates, ensuring you can enjoy affordable EMIs throughout the loan term. The interest rate remains fixed, providing stability and peace of mind regarding your repayment obligations.

Difference between Business Loan and Personal Loan

While loans have become much easier to avail, it’s essential to understand the difference between business loan and personal loan. Here is a tabular representation of personal vs business loans:

 

Business Loan or a Personal Loan: which is better?

The key difference between personal and business loans lies in the eligibility criteria set by banks. Personal loans are often provided to salaried individuals due to their predictable income, offering flexibility in usage and being unsecured. On the other hand, business loans require justification for fund utilization in the business context. While banks may provide business loans without collateral up to a certain limit, for higher amounts, you may need to offer business assets or properties as collateral.

Also Read: How can you get a Personal Loan online with 6 easy steps?

Securing a loan, whether it's a business loan or a personal loan, demands careful consideration of your repayment strategy. Ensure that you use the loan EMI calculator to understand your repayment strategy for both business loan and personal loan. Taking out loans hastily or when facing financial difficulties might not be a good idea. So, it's important to plan thoroughly before deciding on a loan, be it for business or personal needs.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.