Do you want to get a loan for emergency cash assistance, debt Consolidation, home improvement and repairs, or business-related expenses, but you are yet to identify the type of loan option that will be suitable for you?
Then you are on the right page. But before borrowing any sum of money, it is important to start by identifying the specific purpose for which you need financial assistance, doing so, will make the selection of your loan option easier for you.
In this post, we will be discussing the difference between a business loan and a personal loan. This is to help you know the exact type of loan option that will be fit for your present need. Let’s get started! See Top 15 Online Shopping Sites in Australia.
What is a business loan?
Business loans are loans used to finance a variety of business operations and expenses by borrowing money from a lender under specific terms and conditions. See How To Get A Business Loan.
Essentially, business loan can be gotten from the bank based on a predefined list of terms, including the interest rate you will pay in return, the time in which you have to pay back the loan, how the loan is structured, and more.
Key Terms to Know Regarding Business Loans
Business loans can be complicated, so it is essential to know and understand several key terms that you will likely encounter. Below are the terms and phrases you should be familiar with when applying for a business loan.
- Assets – Assets are something of value owned by the borrower or business. Lenders such as banks and credit unions often require some form of “collateral” to be eligible for a business loan. Your business assets may include items such as equipment, vehicles, buildings, and inventory.
- Cash Flow – Cash flow is the net amount of money going in and out of a business used for day‑to‑day business expenses. Positive cash flow indicates that a company is earning more than it is spending, enabling it to settle debts, reinvest in its business, return money to shareholders, pay expenses, and provide a buffer against future financial challenges.
- Collateral – Collateral is any form of asset the borrower offers to a lender to obtain or secure a business loan. The lender can acquire these assets if the borrower cannot pay back the loan or if the borrower defaults. Examples of collateral include real estate, equipment, inventory, and personal assets.
- Repayment Schedule – Sometimes known as an amortization schedule, this is a set plan of monthly payments to repay the loan. Not only does this establish the time horizon you will have to repay the loan, it is an important factor in your monthly payment.
- Personal Guarantee – Many lenders require borrowers and business owners to sign a personal guarantee to be approved for a business loan. This is an agreement to use personal assets or cash flow as collateral to cover the loan if the business can’t pay it back itself. The guarantee is typically signed by an officer or owner of the company.
What is Personal Loans?
Personal loan is a loan that can be used for a variety of purposes, including debt consolidation and medical expenses.
It be a good solution if you need to get funds very fast — some lenders can deposit funds into your account as fast as the next business day.
Key Terms to Know Regarding Personal Loans
- Credit Score and History
An applicant’s credit score is one of the most important factors a lender considers when evaluating a loan application. Credit scores range from 300 to 850 and are based on factors like payment history, amount of outstanding debt and length of credit history.
Lenders impose income requirements on borrowers to ensure they have the means to repay a new loan. Minimum income requirements vary by lender.
For instance, SoFi imposes a minimum salary requirement of $45,000 per year; Avant’s annual income minimum requirement is just $20,000. Don’t be surprised, however, if your lender doesn’t disclose minimum income requirements. Many don’t.
If you’re applying for a secured personal loan, your lender will require you to pledge valuable assets—or collateral. In the case of loans for homes or vehicles, the collateral is typically related to the underlying purpose of the loan.
However, secured personal loans can also be collateralized by other valuable assets, including cash accounts, investment accounts, real estate and collectibles like coins or precious metals.
If you fall behind on your payments or default on your loan, the lender can repossess the collateral to recoup the remaining loan balance.
- Origination Fee
Though not part of the qualification process, many lenders require borrowers to pay personal loan origination fees to cover the costs of processing applications, running credit checks and closing.
These fees usually range between 1% and 8% of the total loan amount, depending on factors like the applicant’s credit score and loan amount.
Some lenders collect origination fees as cash at closing, while others finance them as part of the loan amount or subtract them from the total loan amount disbursed at closing.
Key Differences Between Personal Loans and Business Loans
You can use a business loan for business-related expenses, including payroll, equipment, startup funds, and more.
A personal loan can be used for a mix of personal and business needs, which you might require if you’re just starting out as a company.
The amount of money you can expect to receive from a personal loan varies by lender, but you can generally expect them to go as low as $1,000 and as high as $40,000 or $50,000.
Business loan funding also varies by lender. Some go as high as $500,000, while others offer even greater amounts, such as $2 million or even $5 million.
Personal loan eligibility is based on your credit score and history. The higher your credit score, the more likely you are to qualify for the lowest interest rate available. The lower the score, the less likely you are to qualify.
Eligibility for business loans is tied to your company’s business credit score and history. If your business is still new, you might not have these.
Some banks use your personal credit score and history to qualify for a business loan, but you might need to sign on as a personal guarantor that says you’re personally responsible for repaying the loan if your business can’t.
Some personal loans are secured, in that you can put up savings or a certificate of deposit (CD) account as collateral, but your loan limit is usually tied to how much is in those accounts.
Most business loans are unsecured, but some lenders offer secured business loans. Collateral for secured business loans is typically tied to business assets, such as real estate, equipment, or inventory.
Personal loans tend to have higher interest rates than business loans. Right now, personal loan interest rates average around 11.5%, while average business loan interest rates are just over half that number.
Length of Loan
You can take out a personal loan for three, five, or sometimes seven years. A few lenders will have longer terms, going upward of 10 or even 12 years, depending on the purpose of your loan.
While some business loans might be short-term ones that you’ll need to pay back within one to five years, many business loans have terms as long as mortgages (i.e., upward of 25 or even 30 years). Because there are many different types of business loans, repayment terms can vary as well.
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