Despite rising interest rates witnessed in recent months, people are still taking out loans. In this article, we will explore two types of loans: business and personal loans. Keep reading to find their key differences, along with their advantages and disadvantages.
Business Loan
This type of loan is meant for businesses. That means it is made to companies and not individuals.
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Advantages of a Business Loan
Longer repayment terms – Business loans provided by the United States Small Business Administration usually come with repayment terms of up to 25 years.
High maximum amount – The US Small Business Administration allows companies to borrow a maximum loan amount of $2 million. However, it is worth mentioning that some lenders and banks have varying maximum loan amounts that might be lower or higher than what the Small Business Administration offers.
Different loans for various needs – Lenders offer several types of business loans to suit the needs of different companies. They include equipment loans and working capital loans, among others.
Disadvantages of a Business Loan
Business loans require a high threshold to qualify – If your company does not have a credit history, qualifying for a business loan can be very tough.
Takes longer to secure – Securing a business loan can take several weeks. So, if you need the funds urgently, we will be disappointed.
A personal guarantee might be required – When it comes to business loans, a personal guarantee means that, as the company owner, you will repay the loan if your business fails to do so. Therefore, many lenders usually check your credit score before loaning your firm.
Personal Loan
This type of loan can be used for anything, even covering business expenses. But what are its advantages and disadvantages?
Advantages of a Personal Loan
Used for any purposes – As mentioned, you can take a personal loan and use it for anything.
Fast approval – Many banks will subject you to a quick pre-qualification process to determine if you qualify for a personal loan. Within minutes, you will find out whether you are eligible for the loan.
Quick funding – Most banks usually transfer funds borrowed under personal loans within 24 or 48 hours.
Disadvantages of a Personal Loan
Short repayment terms – Many lenders cap the repayment periods for personal loans at seven or ten years.
Low maximum loan amount – In most cases, the maximum amount of personal loan you can borrow is $50,000. So if you need a bigger amount, you will have to look somewhere else.
High interest rates – Banks impose higher interest rates on personal loans than business loans. The average interest rates in the US on personal and business loans are 11% and 7%, respectively.
Major Differences Between Business Loans and Personal Loans
Uses
Business loans only cover business-related expenses, while personal loans cover both business and personal needs.
Loan Amounts
Business loan amounts are higher than those offered for personal loans. As stated earlier, your firm can receive up to $2 million, while you can only get a maximum of $50,000 through a personal loan.
Eligibility
For your company to qualify for a business loan, its credit score is usually checked. That means securing the loan can be challenging if the firm is new. However, some lenders use your credit score to determine if your company qualifies for a loan.
As for personal loans, your credit score determines eligibility. You are likely to secure such loans if your credit score is high.
Collateral
Most lenders require you to provide collateral when borrowing a personal loan. The amount you can secure depends on the value of the collateral. On the other hand, business loans do not require collateral, although some lenders request security. Collateral for business loans is usually assets owned by a company.
Tax Benefits
In most cases, interests on a business loan are tax deductible, while personal loans have no tax benefits.