Personal loan vs Business loan

22 Feb 2022|

2 min read |

by ICICI Securities Team

When you take a loan from a financial institution like a bank, you promise to pay back the bank the amount you borrowed from them. Even though there are various types of loans, each loan has similar characteristics, which are:

A person who needs money, which is called a borrower

An institution or money lender who can lend money called the lender

The amount which is needed to be borrowed is called the principal

The lender’s payment is the interest rate. It is the price of borrowing money from the lending bank or non-bank.

The time in which the money borrowed has to be repaid is called the loan term.

You can approach a bank by filling out an application form. The bank checks your credit score and credit history. You will also have to provide other documents like statements of your monthly income. If the bank finds that you are managing your previous debt without going into default and that you can repay the loan, you are given the loan. The bank also lets you know how and when you’ll pay the money you borrowed. If you opt for a short-term loan, your payment schedule might be less than a year. But if you opt for a long-term loan like a house loan, then your payment schedule can last for several years. You repay the loan over the specified time, and you also pay interest to the bank at equal intervals during the loan term.

Additional read: How to Get a Pre-Approved Personal Loan

There are many different types of loans. You have plenty of choices to choose from according to your preferences. Mostly, loans fall under two categories – Secured or unsecured. In a secured loan, you are required to provide collateral to the lender. If you refuse to or cannot pay off the loan, the lender can seize the collateral and sell it. In an unsecured loan, you do not have to submit any collateral. Lets us looks at two similar loan choices: the business loan and the personal loan.

A personal loan, as the name suggests, you can borrow to meet any expense. That expense could be a vacation, a purchase of a fancy expensive gadget, or for your wedding. You can use that for your business too. Business loans like the name suggest are not as flexible. They can be used only for your business. You can get a business loan to start a new baking business and need money to buy an oven. You can also get one if you own several restaurants and want to buy machinery for large-scale production.

Let us look at the differences between personal loan and business loan:

Basis	Personal loan	Business loan
Usage	That loan can be used for a variety of expenses. This loan can also be used for your business.	This loan can be used only for business expenses. The amount you borrow will go to a business bank account.
Borrower’s requirements	You need to submit details regarding your income, your credit history ,and your cash flow.	Apart from the details mentioned under a personal loan, you also need to submit details about your business. You need to provide the bank with details regarding the age of your business, its annual revenue and business cash flow. You need to submit your plans and expectations of your business and also the business credit score and business credit history.
Collateral	Personal loans need not be supported by collateral	Most business loans are supported by collateral
Tax benefits	Interest paid on personal loans are taxed	Interest paid on business loans is tax-deductible.
Term	The term of the personal loan is short, usually within one to five years	A business loan can last anywhere between one to twenty years
Interest rate	High-interest rates	Low-interest rates

Additional read: 5 Ways Women Can Benefit from Taking Home Loans

Conclusion:

It is important to have a thorough understanding of personal and business loans before you purchase either of the two. If you want a short term loan with high- interest rates, a personal loan might best suit your needs. But if you want a collateral-free, long-term loan which is exempt from tax, then a business loan might suit you best.

Disclaimer

ICICI Securities Limited has its registered office at ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400025, India, Tel No:- 022 - 2288 2460, 022 - 2288 2470. The non-broking products / services like iLearn and Financial Learning are not exchange traded products / services and ICICI Securities Ltd. is just acting as a distributor/ referral Agent of such products / services and all disputes with respect to the distribution activity would not have access to Exchange investor redressal or Arbitration mechanism. iLearn is not an exchange traded product/service of ICICI Securities Ltd. All disputes with respect to the activity on the platform would not have access to Exchange investor redressal or Arbitration mechanism.

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