Which Loan is Cheaper: Personal or Business Loan?

Choosing between a personal loan and an MSME business loan is an important financial decision. Any credit you obtain can influence your financial health, especially if you are an entrepreneur looking to expand your operations or an individual securing funds for personal use. Each loan option has several pros and cons. This article compares personal and business loans to help you decide which is more affordable and best suits your needs.

Breaking down personal loans and business loans

Let’s understand in detail what are personal and business loans in India.

Personal Loan

This is an unsecured type of credit that can be used to fund various purposes like medical emergencies, weddings, house renovations, etc. The approval process for personal loans is relatively quick, making it a popular choice for short-term financial requirements.

Features:

• No collateral required: You are not required to pledge assets.
• Flexible usage: Funds can be used for various financial needs like medical emergencies, travel, education, home renovations, etc.
• Quick processing: Approval and disbursement are quick with minimal documentation.
• Short repayment tenures: The repayment tenure is usually 1 to 5 years.
• Higher interest rates: Ranges from 10% to 25% annually.

Business Loan

It is a type of financing designed to support entrepreneurs or companies to fulfil their business-related expenses like expansion, purchasing equipment, managing cash flow, and maintaining inventory. Business loans can be secured or unsecured, depending on the lender and the borrower’s creditworthiness.

Features:

• Targeted usage: Funds must be used strictly for business-related expenses.
• Higher loan amounts: Often higher than personal loans, depending on the business’s needs and revenue.
• Lower interest rates: Often lower than personal loans, starting at 8% for MSME business loans.
• Long tenures: The repayment term may be up to 15 years.

Comparing personal and business loans

Here is a detailed comparison of the various aspects of personal and MSME business loans.

Interest rates

The cost of borrowing is very sensitive to interest rates.

• Personal loan: It is an unsecured credit type and thus has high interest, starting from 10% to 25%.
• Business loan: A secured business loan — mainly MSME credit usually comes with lower interest rates, beginning from as low as 8%.

Conclusion: Low interest rates make business loans cheaper.

Loan amount

There is a tremendous difference between the amount you can borrow on personal and business loans.

• Personal loan: The minimum loan amount is usually INR 10,000 to INR 50,000 &  the maximum is between INR 40 lakhs and INR 50 lakhs, based on the lender and the creditworthiness of the borrower.
• Business loan: Secured loans tend to offer higher loan amounts, often stretching up to crores.

 Conclusion: Business loans are better suited for large funding needs.

Repayment tenure

Repayment periods affect the affordability of your EMIs. 

• Personal loan: Has a short tenure (1 to 5 years), resulting in high EMIs. 
• Business loan: Flexible longer tenure (up to 15 years) with lower monthly payments.

Conclusion: Cash flow management is better with business loans because of their extended repayment terms.

Collateral

The loan type determines the requirement of collateral.

• Personal loan: No collateral is needed since it is an unsecured loan.
• Business loan: Can be secured or unsecured. Secured loans require collateral such as property, inventory, or equipment.

Conclusion: Unsecured business loans are advantageous.

Tax benefits

Being able to get tax deductions on the loan can help borrowers significantly.

• Personal loan: Most of the time, no tax benefits are available unless the loan is used for a specific reason, such as home improvement.
• Business loan: Business loan interests are eligible for tax deduction, which reduces the effective cost of borrowing.

Conclusion: Business loans offer more tax advantages.

Processing time

• Personal loan: Approval and disbursement are usually quicker due to minimal requirements.
• Business loan: Larger processing time for detailed documentation and evaluation.

Conclusion: Personal loans are perfect for urgent requirements

Usage restrictions

• Personal loan: Funds can be used freely.
• Business loan: Funds must be used strictly for business purposes.

Conclusion: Personal loans offer greater flexibility in usage.

Which loan should you choose?

Your decision for a loan type should be guided by your needs:

• Opt for a personal loan if you need quick cash with no usage restrictions and have a solid repayment plan despite higher interest rates.
• Choose a business loan if you are funding business-related expenses and want lower interest rates, higher amounts, and tax benefits.

A case study: Ramesh’s decision

Ramesh, an entrepreneur, needed INR 30 lakhs for his business expansion. Initially, he considered a personal loan for its quick disbursement and flexible usage. However, after consulting a financial advisor, he opted for an MSME business loan. The lower interest rate of 9% and tax benefits saved him over INR 3 lakhs in interest compared to a personal loan.

This decision reduced his financial burden and allowed him to reinvest savings into his business, accelerating its growth.

Conclusion

Choosing between a personal and business loan depends on one’s ongoing financial needs, repayment capacity, and future objectives. The former comes with the strength of speedy processing and flexibility, while the latter offers better financial advantages, making it easy for borrowers to give businesses a lift.

We at TallyCapital understand the needs of MSMEs and provide customised solutions to grow the business. Whether it’s to know which business loans in India are the best or want access to resources that spur growth, we’re with you at every step.

Check out what we offer and read more about how TallyCapital can support you to reach your financial goals.