3 Times a Personal Loan Makes More Sense Than a Business Loan

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If you’re planning on starting or expanding a business, finding funding can be difficult. In fact, the Federal Reserve Bank of New York reported that 58% of new companies had challenges getting credit or money to help them grow.

If you’re in need of financing, you likely are considering a personal or business loan. But they work very differently. Find out what you need to know about personal loans versus business loans and how to decide which is right for you.

Personal loans vs. business loans

When it comes to paying for your company’s needs, it’s important to understand how each type of loan works so that you can select the right option for your business. Here’s what you need to know.

How personal loans work

With a personal loan, you work with a bank, credit union, or online lender to take out a loan. When deciding whether to approve your application, the lender looks at your credit history and income. Your business’ performance isn’t a factor.

Because personal loan lenders just consider your information, it’s often easier to get a personal loan than a business loan. You can quickly borrow as much as $100,000, and you have up to seven years to pay it back.

But if your credit isn’t stellar, you might not qualify for a low-interest personal loan. Instead, you could face high interest rates that cause your loan balance to balloon over time.

How business loans work

Business loans are very different than personal loans. To qualify for a business loan, you typically need to provide the lender with extensive documentation, including:

  • A business plan
  • A concrete spending plan for the borrowed money
  • Individual and business tax returns
  • Bank statements
  • An annual report or statement of finances

The extra work can be worth it because business loans usually have high maximums. For example, you can borrow up to $5.5 million through a Small Business Administration (SBA) loan. Plus, you can have as long as 20 years to repay the loan.

Most business loan lenders require you to put up some form of collateral, such as your business’ assets. If you default on the loan, you can end up losing your business or other collateral.

3 times a personal loan is better than a business loan

Although a business loan allows you to borrow more and pay it back over a longer term, there are times when a personal loan makes more financial sense. Here are three occasions when a personal loan can be a better choice than a business loan.

1. Your business is brand new

If your business is relatively new or just starting, you might have problems finding a lender willing to work with you. Most business loan lenders only offer loans to companies that have been in operation for at least a few years — and even these lenders could have higher interest rates.

For example, lenders like Kabbage charge much higher interest rates and fees and have shorter repayment terms than if you qualified for an SBA loan or other traditional loans. For example, if you took out a 12-month loan for $30,000 from Kabbage and qualified for a fee rate of 5.00%, you’d repay a total of $40,800.

Those fees and charges can be steep. A personal loan can be a smart alternative. If you have good credit, you can get the money you need with a personal loan at a much lower rate.

2. You need money right away

Business loans can take weeks or even months to process since lenders have to review your business’ documentation, which takes time. If you need the money quickly, a business loan might not meet your needs.

If you need to act quickly to take advantage of an opportunity, to boost your inventory, or to hire new staff, you’ll likely need to find funding elsewhere. That’s when a personal loan can make more sense.

With many personal loans, you can receive your funds in just a few days, giving you the cash you need right away.

3. You don’t want to risk your collateral

Because most business loans require you to put up assets as collateral, there’s a good deal of risk associated with them.

If you don’t want to risk losing your collateral, a personal loan might be a better option. If you default on your payments, your credit can be damaged, and the lender can send you to collections, but you won’t lose your business or other valuables.

Applying for a personal loan

When thinking about personal loans versus business loans, it’s important to keep your business finances and goals in mind.

How quickly you need the money and how comfortable you are with risk will determine which option is best for you. In some cases, a low-interest personal loan can be exactly what you need to build a thriving business.

Get quotes from multiple personal loan lenders to ensure you get the best rate.

Interested in a personal loan?

LendingTree allows you to compare rates from multiple lenders by filling out one easy form. Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

RATES (APR)loan amount
5.99% – 17.88%1 $5,000 to $100,000
5.69% – 35.99% $1,000 to $50,000
6.98% – 35.89%* $1,000 to $50,000
5.99% – 24.99%3 $5,000 to $35,000
5.99% – 29.99%4 $7,500 to $40,000
15.49% – 35.99% $2,000 to $25,000
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1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Fixed rates from 5.99% APR to 17.88% APR (with AutoPay). Variable rates from 6.49% APR to 14.70% APR (with AutoPay). SoFi rate ranges are current as of November 4, 2019 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. See APR examples and terms. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 6.49% APR assumes current 1-month LIBOR rate of 1.81% plus 3.08% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.
  2. To check the rates and terms you qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull.
    See Consumer Licenses.
  3. Minimum Credit Score: Not all applicants who meet SoFi’s minimum credit score requirements are approved for a personal loan. In addition to meeting SoFi’s minimum eligibility criteria, applicants must also meet other credit and underwriting requirements to qualify.
  4. If you lose your job through no fault of your own, you may apply for Unemployment Protection. SoFi will suspend your monthly SoFi loan payments and provide job placement assistance during your forbearance period. Interest will continue to accrue and will be added to your principal balance at the end of each forbearance period, to the extent permitted by applicable law. Benefits are offered in three month increments, and capped at 12 months, in aggregate, over the life of the loan. To be eligible for this assistance you must provide proof that you have applied for and are eligible for unemployment compensation, and you must actively work with our Career Advisory Group to look for new employment. If the loan is co-signed the unemployment protection applies where both the borrower and cosigner lose their job and meet conditions.
  5. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
2 Includes AutoPay discount. Important Disclosures for Payoff.

Payoff Disclosures

  1. All loans are subject to credit review and approval. Your actual rate depends upon credit score, loan amount, loan term, credit usage and history. Currently loans are not offered in: MA, MS, NE, NV, OH, and WV.
3 Important Disclosures for FreedomPlus.

FreedomPlus Disclosures

  1. All loans available through FreedomPlus.com are made by Cross River Bank, a New Jersey State Chartered Commercial Bank, Member FDIC, Equal Housing Lender. All loan and rate terms are subject to eligibility restrictions, application review, credit score, loan amount, loan term, lender approval, and credit usage and history. Eligibility for a loan is not guaranteed. Loans are not available to residents of all states – please call a FreedomPlus representative for further details. The following limitations, in addition to others, shall apply: FreedomPlus does not arrange loans in: (i) Arizona under $10,500; (ii) Massachusetts under $6,500, (iii) Ohio under $5,500, and (iv) Georgia under $3,500. Repayment periods range from 24 to 60 months. The range of APRs on loans made available through FreedomPlus is 5.99% to a maximum of 29.99%. APR. The APR calculation includes all applicable fees, including the loan origination fee. For Example, a four year $20,000 loan with an interest rate of 15.49% and corresponding APR of 18.34% would have an estimated monthly payment of $561.60 and a total cost payable of $7,948.13. To qualify for a 5.99% APR loan, a borrower will need excellent credit on a loan for an amount less than $12,000.00, and with a term equal to 24 months. Adding a co-borrower with sufficient income; using at least eighty-five percent (85%) of the loan proceeds to directly pay off qualifying existing debt; or showing proof of sufficient retirement savings, could help you also qualify for the lowest rate available.
* Important Disclosures for Upgrade Bank.

Upgrade Bank Disclosures

* Personal loans made through Upgrade feature APRs of 6.98%-35.89%. All personal loans have a 1.5% to 6% origination fee, which is deducted from the loan proceeds. Lowest rates require Autopay and paying off a portion of existing debt directly. For example, if you receive a $10,000 loan with a 36-month term and a 17.98% APR (which includes a 14.32% yearly interest rate and a 5% one-time origination fee), you would receive $9,500 in your account and would have a required monthly payment of $343.33. Over the life of the loan, your payments would total $12,359.97. The APR on your loan may be higher or lower and your loan offers may not have multiple term lengths available. Actual rate depends on credit score, credit usage history, loan term, and other factors. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. There is no fee or penalty for repaying a loan early. Personal loans issued by WebBank, Member FDIC.

** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.

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