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The Pros and Cons of Using Personal Loans for Your Business

Jan 24, 2020 04:24 PM EST | By Staff Reporter

The Pros and Cons of Using Personal Loans for Your Business

(Photo : The Pros and Cons of Using Personal Loans for Your Business)

When applying for a loan for their business, entrepreneurs and business owners would usually go for a business loan. It can be a taxing experience, especially for those who still don't know the ins and outs of the transaction. Because of this inexperience, chances are they wouldn't be able to take steps to ensure that their application would be approved.

There are many reasons why business loans get rejected. Sometimes it's because the business's performance is weak. Other times it's because of the collateral. Low credit scores and the business owner being in too much debt plays a huge factor, also. Whatever the reason is, this makes business loans a much harder affair to manage. 

So some turn into personal loans. Since personal loans are easier to apply for and can be used on just about anything, it has become a popular alternative. Personal loans come with rules, of course, which is highly dependent on the lenders.

What Are Personal Loans?

A personal loan is a loan borrowed with a fixed rate with a fixed payment term. Meaning, you will have to pay a fixed monthly rate, sometimes called installments, during a specific time. Failure to follow these can cause penalties and fees. 

There are two types of personal loans: secured loans and unsecured loans

  • Secured loans need to have collateral before you can apply for it. It has stricter terms, too. 

  • An unsecured loan, on the other hand, is the opposite. 

These loans can be used on just about anything. Lenders would sometimes still need to know, though.

The Pros of Personal Loans

If you're planning to take a personal loan, here are the advantages you can get;

Low APR

If your credit score displays pleasant numbers, then you can negotiate for a low APR. This can go as low as 6% and could go even lower depending on lenders. This is a vast difference compared to business loans, where rates usually start at either 20% or 10%. However, if you have a poor credit score, the lowest your interest can go will be somewhere between 18% to 36%.

Fixed payments

Because you have a set amount you're going to pay back, paying off a personal loan would be easier than other loans. As mentioned before, it has a fixed monthly rate and is paid as installments. The usual term for a personal loan is 3-5 years, but there are exceptions where lenders would be willing to agree for more extended periods.

Easier application

Unlike business loans, a personal loan is easier to apply for. With good credit scores, credit history, and credit reports, lenders would be willing to lend you money. New business owners would be able to cover expenses they cannot pay yet. 

Just make sure you check your credit reports before applying. Sometimes, questionable statements or old records could cause lenders to hesitate with your application. Find a way to dispute them or update your credit report.

Available for Startup Companies

Since most banks are reluctant to lend to small businesses that do not have a set customer base, financing your startup would be near impossible. Because of a personal loan's lax restrictions when it comes to spending, you can use this type of loan to help you begin managing your startup. 

The Cons of Personal Loans

Personal loans have its fair share of disadvantages too that you need to be aware about. Take your cue from the following;

Personal credit check requirement

Lenders would look at your credit score from any of the major credit bureaus. Because of this, an inquiry will show up on your credit report, subsequently lowering your score. 

However, some lenders have monthly installment loans no credit check required. Just look for these types of lenders if you don't want any record tarnishing your credit report. 

Lower borrowed amount

Since personal loans are usually used for personal reasons and not businesses, it tends to have a lesser amount of money that you can borrow. Business loans can reach up to a million dollars or more. A personal loan only ranges from $50,000 to $100,000, though only a few lenders will offer the latter. But with excellent credit, offers can reach $150,000. 

Damage on credit score

Your personal credit could be damaged if your business cannot accumulate enough profit to pay back the debt. It will show in your credit report and history if you paid late or failed to pay at all any of the monthly payments. This damages your credit score instead of the business. 

Losing your collateral

As mentioned before, secure personal loans needed collateral before being signed off. Usually, this collateral comes in the form of cars, personal assets, or even your own house. A defaulted loan will guarantee that your lender can seize the assets to pay off what you borrowed. 

Takeaway

Financing a business, especially new ones, can be extremely difficult. Few banks would immediately reject your business loan application for factors like business performance. Personal loans are an excellent alternative for your business. Though, like everything else, it has its pros and cons. Just be responsible enough to pay what you owe so you and your business would not suffer as a consequence.

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