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Personal Loan vs Business Loan: Which Is Better? Research Team | Posted On Monday, August 27,2018, 11:46 AM

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Personal Loan vs Business Loan: Which Is Better?




What is a personal loan?

A personal loan is a short-term loan availed to meet financial emergencies. Personal Loans are also called Emergency loans. Borrowers are expected to repay personal loans within a short time (1-7 years).

Personal loans are unsecured loans as the lender doesn’t ask for collateral/security. This is the reason why banks charge higher interest on personal loans, than most other loans.


Personal loan eligibility:


The most common eligibility criteria for availing a personal loan are:

  • Applicant must be an Indian resident
  • Minimum age must be 25 years
  • Maximum age of the applicant must be 58 years at the time of loan maturity
  • Applicant must have an Indian bank account
  • Applicant’s monthly net income should be at least Rs 15,000-20,000


Personal loan interest rates:


Banks don’t ask for security/collateral for personal loans. As these are unsecured loans; interest rates are high. Personal loan rates are around 14-21% a year.


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Documents required for personal loan:


1. Identity Proof: PAN, Passport, Driving License, Aadhaar Card, Voter ID.

2. Address Proof: Driving License, Voter ID card.

3. Age Proof: Driving License, Birth certificate, School/College leaving certificate.

4. Financial Statements: Bank statement of past 6 months.


What is a business loan?


A business loan is a loan availed for business purposes. Business loans can be availed for expansion of business, working capital requirements, and so on.


Business loan eligibility:


Business loans can be availed by:

  • Self-employed businessmen or professionals
  • Limited or Private Limited Firms
  • Manufacturer, retailer or service provider


Eligibility criteria:


  • Applicant must be at least 21 years of age
  • The maximum age of applicant must be to 65 years on loan maturity
  • The business should have been in existence for at least 3 years
  • The business should have been earning profits for the last 2 years
  • The turnover must be at least Rs 40-50 Lakhs per year
  • The minimum profit earned must Rs 1-2 Lakhs


Business loan interest rates:


Secured business loans have lower interest rates than unsecured business loans.


Documents required for business loan:


  • Income proof: Last 3 years ITR, bank statements.
  • Business proof: Certification of practice
  • Recent photograph
  • Identity proof: Aadhar Card, Voter ID Card, PAN Card, Company registration certificate
  • Other Documents: Certified Copy of Partnership Deed, Certified copy of Memorandum of Association and Articles of Association.


Personal Loan v/s Business loan: Which is better?


Both personal and business loans have their pros and cons. Let us discuss some of them:

1. Availing a personal loan is easier than a business loan.

2. When sanctioning personal loans, lenders don’t ask for reasons. They’ll just look at your credit score. On the other hand, when availing business loans, banks look at your credit score, business plan and other important financial statements.

3. Personal loans are processed faster than business loans.

4. Collateral makes a huge difference. Personal loan for business can be obtained without pledging any collateral. But most business loans require collateral.

5. If you avail a personal loan for business and you don’t make the repayments, your credit score is hit. This has a dual effect: your business fails and your credit score is hit. Availing any loans in the near future gets difficult.

6. Availing a business loan separates your personal finances from the business. A business loans limit your personal liability should the business default.

7. Sometimes, a business loan demands personal guarantee.


Flexibility: Personal Loan v/s Business loan:


When it comes to flexibility, personal loans are more flexible than business loans. Personal loans are also called no reason loans. You can utilize the loan for any purpose. A business loan is specific and it has to be used strictly for business purposes only.


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Tax Benefits: Personal Loan v/s Business Loan


1. Personal Loan Tax Benefits:


Personal Loans have tax benefits depending on the purpose. You can claim tax benefits on personal loan if it is used for:

1. Home renovation or

2. Down payment on a house


2. Business Loan Tax Benefits:


Business loans come with different tax benefits. Interest paid on any business loan is eligible for tax deduction. This interest is deductible from the gross income of the company, lowering taxes payable.

The principal repayments on a business loan are not eligible for tax deductions.


SEE ALSO: How To Pay Off Home Loan Faster?


When to avail a personal loan for business?


1. It is easy to get a personal loan if basic eligibility criteria are fulfilled. Some banks also offer instant personal loans.

2. If you are just starting a business. While granting business loans, banks ask for a business setup. This helps them evaluate the ability to repay the loan. In such cases, you can avail a personal loan as it gives flexibility to use funds for any purpose.


When not to avail a personal loan for business?


If you aren’t comfortable paying high EMIs. Personal loans are unsecured and come with high interest rate. They are loans of short tenure. Availing personal loans means paying hefty EMIs.

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