What is the Difference Between a Consumer Loan and a Business Loan

What is a Consumer Loan?

A consumer loan is where banks, lending companies, and government agencies extend credit to a consumer who takes it to pay for personal and household expenses. The best thing about a consumer loan is that it addresses several purposes rather than one. 

Examples of consumer loans are personal loans, home loans, auto loans, motorcycle loans, and student loans. These loans are ideal for Filipinos from all walks of life and may or may not require collateral. Consumers apply for this loan for several reasons to afford the products and services they can’t pay for in cash. 

For example, a growing family planning to buy a house and lot can ask for financing from their bank to start the construction together with their downpayment. Others take a personal loan to pay for school expenses like gadgets, school supplies, and tuition fees.

What is a Business Loan?

A business loan caters to the financial needs of business owners, startups, SMEs, and large corporations. The loan proceeds are for initial expenses, purchase of equipment, rental fees, and investments. 

Even more, securing a business loan is reasonable for some businesses to get their plans off the ground. If you plan to apply for a business loan, keep in mind that you must consider the loan amount, loan term, and interest rates, which are all included in the loan agreement that the lender provides. 

Once you sign the agreement, you are financially committed to paying for the monthly amortization. Qualified businesses who wish to avail of the benefits of business loans may get one from traditional banks, online or private lenders, and the government. Loan proceeds are available as a lump sum payment or a line of credit. 

Difference Between a Consumer Loan and a Business Loan

Here are the key differences between consumer loans and business loans, such as the following:

Loan Features

Banks and lending companies offer a higher loan amount for business loans than consumer loans. For example, on average, personal loans have loan amount of up to ₱2 million. On the other hand, business loans can be as much as  ₱50 to 70 million.

A business loan generally has shorter payment terms and a higher interest rate than a consumer loan. The term, interest, and loan amount often depend on the collateral provided. In contrast, although consumer loans have a loan amount of up to ₱10 million, but have lower interest rates and may or may not require collateral.

Collateral Requirement

Lenders require borrowers to have collateral as a guarantee for full loan payment. In general, a consumer loan and a business loan have collateral requirements. You may use investment, real estate property, and other business and personal assets per the lender’s assessment. 

Consumer loans are available as secured and unsecured loans. Some lenders offer a high loan amount without any collateral, making it an unsecured loan. The borrower must have a good credit score to be eligible, but the caveat is that the lender may offer high interest rates since there’s no collateral. 

Requirements 

A consumer loan’s eligibility criteria and requirements are more lenient than a business loan. Most lending companies will only ask for personal information and proof of the borrower’s capacity to pay. In most cases, lenders approve loan applications with only valid government-issued IDs and a certificate of employment (COE). 

Business loans have complicated loan processes on top of the detailed requirements and credit investigations that banks and lenders will conduct. It just makes more sense to have such a comprehensive process since companies can borrow high loan amount.

Conclusion

As long as consumers and companies practice responsible borrowing, they can enjoy the perks of consumer loans and business loans. An individual capable of handling personal loans to improve the quality of life can freely choose which type of consumer loan he wants. 

Companies with excellent financial planning and budget management have access to competitive rates and flexible payment terms that banks offer for business expansion. Overall, knowing the differences between these two loans can help you make wise financial decisions.