Thinking of using a personal loan for your startup? 5 things to know first

Personal loans have become increasingly popular among individuals seeking to finance various needs, including medical expenses, education, business growth, and expansion.

However, funding a business through a personal loan is somewhat complicated and involves several key considerations before applying. Here are five significant things to keep in mind when considering using personal loans for business:

1. Easy availability of money

One of the strongest advantages of personal loans is the quick access to funds. Unlike traditional business loans, which often require extensive paperwork and lengthy approval processes, personal loans can be approved promptly, sometimes even within hours. They are therefore suitable for business professionals who may need rapid access to capital to finance operational costs or invest in new ventures during times of crisis.

2. Unsecured nature

Personal loans tend to be unsecured; therefore, the borrower isn't required to put up collateral. This is actually a highly convenient feature for new business owners who don't yet possess something of value against which to borrow for a loan.

However, this carries with it the threat that lenders will lend at an increased interest rate than secured small business loans, and complex loan repayment terms. This may be a source of additional financial stress if it isn't handled wisely. Secondly, the repayment terms might also be less favourable due to the unsecured nature of these loans.

Large Indian banks offer business loans at varying interest rates. The personal loan interest rates applicable in October 2025 are briefly discussed below.

Personal loan interest rates October 2025

The currently applicable personal loan interest rates and processing charges are elaborated upon below:

Source: Bank websites

Note: The interest rates and processing charges mentioned above are illustrative in nature and subject to change as per each bank’s internal policies and applicant profile. Readers are advised to verify details on the respective bank's website before applying.

Furthermore, these interest rates and charges can vary depending on changes in bank policies, interest rates, processing fees, and directions from the RBI. That is why it is always prudent to reach out to your financial institution for the actual and correct rate of interest applicable in your case.

3. Loan amount limits

Personal loans, though convenient, have lower borrowing capacities than business loans. Most lenders set personal loans at a limit of ₹10 lakhs, which may prove inadequate for capital-intensive ventures or extensive expansion programs. Entrepreneurs will need to strategise their financial needs and repayment capacity before opting for this route.

4. Impact on personal credit score

A personal loan affects an individual's creditworthiness, as it is reported against their credit history. Now, your consistent repayment punctuality enhances creditworthiness, but failure to pay has a serious impact on your credit score.

That is why, if you are looking to start a new business, you are advised to avoid having a faulty repayment plan, as it could damage your credit profile and financial health. Any impact on your credit score will make future loans and credit card applications more complicated.

5. Tax implications

Interest on personal loans taken for business purposes may not be exempt if there is insufficient documentation to prove that the borrowed amount was incurred for business expenses. This could make tax filing challenging and require due documentation on behalf of the borrower.

Apart from that, it is always best to consult a chartered accountant, financial advisor, and a tax consultant to understand how personal loans taken for business are to be accounted for in terms of tax.

Furthermore, before going ahead with any loan product, one should also acknowledge and understand the 5 C's of business lending. These are discussed briefly below.

5 C's of business lending

• Character: Checks the creditworthiness, reliability and integrity of a borrower in repaying loans and availed debt.
• Capacity: Checks the business's ability to repay the loan based on its cash flow and income.
• Capital: Examines the total amount of funds invested in a business.
• Collateral: This refers to the assets pledged to ensure easy approval of loans.

Conditions: Consider factors such as the loan's objective, interest rates, and market environment.

In conclusion, although personal loans are a convenient source of finance for business start-ups or expansion, they have inherent constraints and dangers that must be considered very seriously before committing to such loan products and services.

Risks such as high interest rates, processing fees, the possibility of defaults, and negative implications for credit scores should not be overlooked before applying for a personal loan.

For all personal finance updates, visit here.

Disclaimer: Mint has a partnership with fintech companies to offer credit; you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article aims to educate readers and raise awareness about the essential needs for credit, including loans, credit cards, and credit scores. Mint does not promote or encourage taking credit, as it comes with risks such as high interest rates and hidden charges. We advise investors to discuss with certified experts before taking any credit.