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.
The most common eligibility criteria for availing a personal loan are:
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.
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.
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 loans can be availed by:
Secured business loans have lower interest rates than unsecured business loans.
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.
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.
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
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?
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.
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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