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Business News/ Money / Personal loan for business: Here are its pros and cons
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Personal loan for business: Here are its pros and cons

Personal loan for business: While many personal loans offer flexibility in fund usage, opting for this route is generally not the most advisable choice. Prospective borrowers should prioritise exploring business loan options first.

Securing a personal loan for business purposes.Premium
Securing a personal loan for business purposes.

Personal loan for business: Personal loans are usually taken and used for personal expenses but some borrowers may consider taking this type of credit to finance their small business ventures.

Utilising a personal loan for business-related expenses is feasible. This is because many personal loans offer flexibility in fund usage. As long as you adhere to the lender’s eligibility requirements and repayment conditions, you’re generally free to utilise the funds for your business needs. 

Should you take a personal loan for business?

While a personal loan for business use may seem attractive due to its easier qualification process compared to traditional business loans, it’s typically not the optimal choice. Nevertheless, here are some reasons why you might contemplate using a personal loan for your business:

  • Small business requirements: If you require a modest sum of money for a brief business necessity, a personal loan could be viable, particularly if you possess good credit and qualify for a competitive interest rate.
  • Quick access to funds: Personal loans are frequently quicker and simpler to acquire in comparison to business loans, which may entail more intricate paperwork and approvals.

Cons of taking personal loans for business

There are disadvantages associated with obtaining personal loans for business needs. This is because of the following reasons:

  • Elevated interest rates: Personal loans generally carry higher interest rates in comparison to business loans, which can substantially inflate the total borrowing expenses for your business.
  • Shorter repayment periods: Personal loans often feature shorter repayment durations than business loans, resulting in larger monthly payments that may burden your cash flow.
  • Absence of collateral: Personal loans are typically unsecured, implying that you don’t pledge any collateral such as property. This can increase the risk for lenders, possibly resulting in stricter approval criteria or elevated interest rates.
  • Intermingling personal and business finances: Employing a personal loan for business objectives can blur the boundary between your personal and business finances, leading to challenges in tracking business expenses and potentially complicating tax filings.
  • Impact on personal credit: Defaulting on the loan jeopardises your credit score, making it more challenging to secure future loans, including personal loans, mortgages, and car loans.
  • Tax considerations: Interest paid on business loans is frequently tax-deductible, whereas interest on personal loans typically isn’t. This can contribute to the overall expense of utilising a personal loan for business purposes.

Alternatives to personal loans for business

Several alternatives to a personal loan for business purposes might provide more favourable rates, terms, and are better aligned with your business's financial well-being. A personal loan should be considered only as a final option for business financing.

  • Business loan: This stands as the preferred choice for the majority of businesses. Business loans generally offer lower interest rates compared to personal loans and are tailored specifically to address business requirements. However, securing a business loan can prove more challenging, particularly for fledgling businesses.
  • Business credit card: For short-term financing requirements, a business credit card can serve as a suitable choice. Nonetheless, it’s crucial to avoid carrying a balance on a business credit card, as the interest rates may exceed those of a personal loan.
  • Small business grants: Numerous government and private grants are accessible to small businesses. These grants offer an excellent avenue for securing funding for your business without the necessity of incurring debt.

It’s typically recommended to explore business loan alternatives before considering a personal loan. However, if you opt for a personal loan, ensure you comprehend the interest rate, repayment terms, and any accompanying fees. Additionally, confirm that the loan payment aligns comfortably with your budget.

Frequently Asked Questions (FAQs)

Q. Where can I access my loan amortization schedule?

Your lender should have furnished you with an amortization schedule upon finalising your loan. Additionally, you may be able to retrieve it online via your lender's website or mobile application. Some lenders offer the option to generate your amortization schedule using an online tool.

Q. What are the reasons for checking your loan eligibility beforehand?

Checking your loan eligibility in advance can prevent you from applying for loans for which you may not qualify. This saves you time and effort by avoiding the completion of applications that are likely to be declined. Furthermore, multiple loan rejections in a short period can have adverse effects on your credit score. Pre-qualification also enables you to concentrate your efforts on lenders where you have a greater likelihood of approval, making it essential to check your loan eligibility beforehand.

Q. How does pre-qualifying for a loan aid in obtaining the most favourable rates?

By pre-qualifying with multiple lenders, you can gain an initial understanding of the interest rates and terms you might qualify for. This enables you to compare various loan options and select the lender offering the most competitive rates and terms that suit your requirements. Opting for the lender with the lowest interest rate can potentially result in significant savings over the loan term.

Q. What do you know about personal loan eligibility checks?

A personal loan can serve as a beneficial resource for financing diverse needs, ranging from consolidating debt to addressing unexpected expenses. However, before applying, it's essential to ascertain whether you meet the personal loan eligibility criteria. Personal loan eligibility is determined by several factors established by lenders. These typically encompass:

  • Minimum credit score
  • Income and employment status
  • Debt-to-income ratio (DTI)
  • Desired loan amount
  • Other considerations such as work history, residency status, or existing banking relationship with the lender.

Q. What are the benefits of assessing eligibility before applying?

Reviewing your eligibility for a personal loan before proceeding with the application offers numerous advantages. This proactive approach can save you time, safeguard your credit score, and ultimately lead to securing a more favourable loan deal. Let's delve into the benefits:

  • Preventing hard inquiries
  • Making informed decisions
  • Comparing loan options

 

 

 

 

 

 

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Published: 28 Mar 2024, 07:30 PM IST
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