HomeFinanceWhat is the difference between Personal Loan and Business Loan?

What is the difference between Personal Loan and Business Loan?

Unsecured Loan also known as personal loan is issued for any personal usage. Business loan is a form of secured loan which is issued for the sake of business requirements where a collateral is secured to get a loan.  

The main purpose of a business loan is to use the funds towards business purposes. It is issued in the name of the company  and it is not issued in personal name. The eligibility criteria, ROI, terms and conditions are different from the personal loan.

Advantages of Business Loan

The repayments of business loans is very lengthy generally it is as long as 25 years and more. It has the highest maximum loan amount.

There are different types of loans which you can avail from the banks for the purpose of business; these include working capital loan, equipment loan and much more. Different types of lenders provide different types of loans for the sake of business.

Disadvantages of Business Loan

There  are high  standards to qualify for the loan, several parameters like checking credit worthiness, history of payments, hardship of the business, business recovery, assessment of financial data and much more.

The process to get a personal loan is very lengthy. You should go around the lender multiple times for weeks to get your loan approved. You cannot get funds approved within minutes as you get a personal loan.

Requires a personal guarantee for your business which means a group of partners or a single person is held responsible for repayment of business debts if business bankrupts. Individual credit scores will be checked during assessment of loan issuance. 

Personal Loan

Personal loans are used for the personal interest. There are no guidelines on how and for what purpose a personal loan can be used. It depends on the individual requirements for which funds can be used. 

Advantages of Personal Loans

There is no restriction on usage of personal loans. No banker can question you for the purpose of usage of personal loan. This is the main advantage of personal loan compared to business loan. A personal loan can also be used for setting up a business. 

Personal loans are quickly approved and they are prequalified based on the nature of transactions of the customer. A check on the credit score is the main criteria for issuing a personal loan. Once your loan is approved funds will be credited into your bank account within a day or two.

Click here for How to manage your Personal Finances?

Disadvantages of Personal Loans

The repayment period may be five years, ten years and so on. If you want to close there may be foreclosure charges which  are higher. 

Personal loans have a higher interest rate compared to business loans. The personal loans rate of interest ranges from 11% to 19%  and again depends on the lenders. Whereas the business loan rate of interest by the traditional lenders will range from 6% to 7% interest with the secured collateral.

Personal loans will help you to build credit score whereas it is different for the business credit score. In business, timely payment of business loans will not add much to the credit score. 

Differences Between Personal Loan and Business Loan

Loan usage

Business loans can be used for business purposes such as business establishment expenses, business equipment purchases, salaries payments and much more.

Personal loans can be used for a variety of purposes and there is no tracking required for usage of personal loans. You can also use the funds as a start up fund for your business.

How to get it?

Personal loans or a business loan are issued by the lending institution such as banks or Non banking institutions, credit unions or any other financial institutional lenders. Banks have specific desks with rules & guidelines for business loans and also personal loans whereas some institutions have general guidelines for issuing credit for business loans and personal loans.

Allotment of loan

The loan offers issued by the bank for personal loans is different from lender to lender but all banks will consider credit score for issuing a personal loan.

Business loan amount assessment depends on the collateral. This will purely depend on the applicant and nature of business. Loan allotment is done by banker’s assessment and considering various factors like nature of business, type of collateral, business guarantee and other factors. 

Click here for How to close a personal loan in the UAE?

Who is Eligible to get?

For a personal loan to become eligible you need a good credit score and credit history. The higher the credit score the higher is the loan amount and vice-versa. 

Business credit score is assessed along with a credit payment history for issuing a business loan. If you are new to the business then these factors are not considered, here the personal credit score of an individual is assessed for issuing a loan. 

Collateral security

Some lenders issue personal loans which are secured by the collateral such as certificates of deposit or savings accounts. The loan amount will be determined by the amount in the savings account or certificate of deposit. 

Business loans are issued based on the collateral security such as assets of the business, inventory, equipment and much more.

ROI

Rate of interest (ROI) is very high on personal loans compared to business loans. The average ROI on the personal loan is 11.5% whereas the business loan ROI is half the average of the personal loan. 

Duration of the loan

The duration of the personal loan ranges from 3 years or 5 years or 10 years depending on the banker. Depending on the nature of the loan and borrower’s credibility, duration of loan may be higher depending on the lender’s discretion.

Business loans are secured loans that may range from one to five years or even higher. Based on the mortgage collateral secured business loan duration can be 10 years or 15 years or even 25 years.

Take away

Business loans are taken only for the purpose of business and their related expenses but cannot be used for personal purposes. Personal loans are taken for personal purposes but they can also be used for business purposes. Those businessmen who do not have credit score personal loans are good to secure a loan. There are no tax benefits provided for personal loans whereas business has the tax benefits under UAE CT law. 

About the author

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Vinay Kumar Goguru is a finance professional with more than 8 years of diverse experience as a researcher, instructor and Industry work experience with both public and private entities. Prior to MyMoneySouq, he spent 6 years in Berkadia, It's a commercial mortgage banking company. He has a "Doctoral Degree in Commerce" and two master's degrees with a specialization in Finance, one as Master of Commerce and other as Master of Business Administration. He has written several articles on personal finance, published by different International journals. He loves traveling, reading and writing is his passion. He has a dream of writing a book on his favorite finance topics.

Vinay Kumar
Vinay Kumar
Vinay Kumar Goguru is a finance professional with more than 8 years of diverse experience as a researcher, instructor and Industry work experience with both public and private entities. Prior to MyMoneySouq, he spent 6 years in Berkadia, It's a commercial mortgage banking company. He has a "Doctoral Degree in Commerce" and two master's degrees with a specialization in Finance, one as Master of Commerce and other as Master of Business Administration. He has written several articles on personal finance, published by different International journals. He loves traveling, reading and writing is his passion. He has a dream of writing a book on his favorite finance topics.

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