Business Loan vs Personal Loan Interest Rates: Which is Lower?

Are Interest Rates on Business Loans Lower than Personal Loans?

Interest rates are one of the most important deciding factors businesses must consider before choosing a lender and loan type to borrow, so knowing where the lower interest rates can be found is key. People may believe that personal loans have lower rates than business loans or vice versa, but, really, it all depends on your lender and the terms, qualifications, and rates they can offer you.

Traditionally, business loans have been shown to have lower interest rates than unsecured personal loans, but they tend to make up for that by demanding significant collateral submissions to help offset their risk. However, this typical rate outcome may not always be true in the market because there are many factors that may affect your business loan interest rate.

What Loan Types Have Higher Interest Rates? 

Businesses try their best to avoid higher interest rates when selecting loans and loan providers so that they’ll be paying less money in the long run for the amount they borrowed. But high-interest rates, contrary to popular belief, may not always be a bad thing. In fact, they may be preferable in the right scenario.

For example, if you have the option of choosing a long-term loan with a low-interest rate or a short-term loan with a higher interest rate, it may be beneficial to you to sit down and work out the math to see how much you’ll actually be paying back. You may find that while rates are lower for the longer-term loan, since you’ll be paying that interest significantly longer than you would be paying the higher interest rate on a short-term loan, the loan with the lower interest rate may actually be more expensive.

In fact, many different loan types, including short-term loans, invoice factoring, and merchant cash advances, all come with interest rates that are higher than those that longer-term loans may have, but they come with many other advantages that traditional loans just can’t make up for–advantages like financial flexibility, higher approval probability, and no need of collateral.

Factors that Influence Your Business Loan Interest Rate 

There are many different factors that can influence the interest rate you’ll receive on your business loan, and each of them will affect you in different ways. Loan type, lenders, and your personal business needs are three main factors that play a big role in determining your rates. Let’s take a closer look at each to see exactly how they may affect your business.

Loan Type 

There are many different loan types available on the market today, and each comes with a slew of advantages and disadvantages that can impact your business’ rates. Traditional bank loans, for example, typically have some of the lowest AIR (Annual Interest Rate) available, ranging from 2%-13%. However, if you choose a merchant cash advance, your rates will significantly increase to anywhere from 20% to 250%.

Lender 

Like loan types, there are many different lender types that are available to aid your company, and each has its own impact on your potential interest rates. SBA lenders, for example, are very competitive, and, depending on your loan type, they may be willing to negotiate your rates lower than competing lenders like microlenders or smaller community banks.

Business Needs and Recommended Loan Options 

Your specific business needs will also play a role in determining which interest rates you will get with your loans. For example, if you need a significant amount of money, unsecured personal loans with their higher rates will be off the table for you, and you’ll likely need to take out a business loan with lower rates to receive the capital you need. However, if you need a smaller loan and don’t have any capital to put up as collateral for a business loan, depending on the lender, you may need to take out a personal loan with a higher interest rate.

Other Expenses that Influence Loan Terms 

While interest rates are a deciding factor for businesses when they shop for loans, they are by no means the only expense you need to look out for. There are a plethora of other fees that are associated with most business loan types, so it’s important to make sure you carefully investigate all the costs you’ll be accruing instead of just rate shopping.

A few key expenses you may want to look out for include: origination fees, underwriting fees, closing costs, late payment fees, prepayment penalties, service fees, insufficient funds fees, guarantee fees, processing fees, loan packaging fees, referral fees, and factor rates.

Benefits of a Business Loan vs Personal Loan

Business loans and personal loans each come with many key advantages and disadvantages that can help you determine which option is going to be the best choice for your needs. Let’s take a closer look at the different benefit offerings each loan type provides before comparing their potential drawbacks.

Business Loan Benefits

Business loans are designed with business in mind, so it makes sense that they would have much to offer to companies in need of them. Business loans typically have much higher payout amounts than personal loans, so you’ll be able to withdraw significantly higher amounts of money to take care of your expenses. Further, they are catered to helping your business succeed, so they tend to come with many products and tools to help you reach your goals and make repayment easier down the line.

Additionally, business loans can only affect your business–not your personal life. That means that if you fail to pay for any reason, lenders may not seize your house, personal vehicles, or assets to make up the money they lost. They can only seize assets and change financial records, like credit scores, if they are business-related.

Personal Loan Benefits

Personal loans are great for anyone who is in need of a longer-term repayment period because they usually offer an average of five years for repayment, sometimes extending that timeline as high as seven years. Additionally, all of the repayments you make over those five to seven years will be fixed, so you don’t have to worry about potentially high-interest rate spikes. 

Personal loans also let you borrow the exact loan amount you need rather quickly, so you don’t have to worry about long wait times to receive the money you’re borrowing. This comes in handy, especially for those transactions that are time-sensitive.

Finally, personal loans come from a wide range of providers. This means that not only will you have a plethora of options to choose from when selecting a lender, but that their rates will be competitive and favor you, the borrower because they have a lot of healthy competition.

Disadvantages of Business Loans

Business loans do much for companies that need them, but they are not without their faults. Traditional business loans tend to have very long application processes that take up a lot of your time and can significantly delay when you can receive the capital you need for your business. And to even qualify for a business loan, you have to be able to prove you have a long, positive trading history that can speak for your ability to make profits enough to pay back the loan in a timely fashion. 

Additionally, because businesses have to prove their trading history this way, business loans may not always be available to younger businesses that don’t have a long track record to speak for them. Further, businesses that have pre-existing debt are very unlikely to be approved for personal loans.

Disadvantages of Personal Loans

While personal loans have much in their favor, they also come with a few disadvantages that may make you reconsider borrowing from a personal loan provider. With personal loans, the amount you’re allowed to borrow is very limited, so it may not be able to meet the needs of your business. And even if you can get an amount that works for you, you’ll need to be strategic when choosing a lender because some will not allow you to use their personal loans for business-related expenses. You’ll also be personally liable for the loan. 

Additionally, personal loans are not tax-deductible, which means that overall you may end up paying more on the loans than you would with a business loan because you won’t receive any tax benefits. On top of that, personal loans often have higher rates than business loans, so your expenses will need to cover that extra charge as well.

Where Can I Get a Business Loan?

There are a few different places you can get a business loan today. Traditionally, business owners have had to go directly to their banks and undergo a brief inquiry and application process to receive a loan. However, there are also online options where you can either apply for a loan directly through the SBA (Small Business Association) or through online lenders and brokers.

Fundid Capital

With Fundid Capital you can apply online easily and quickly by filling out a short application. There is no fee or obligation and your credit will not be impacted for applying. A dedicated funding advisor will provide you with several options for capital to help you grow your business. They will help you evaluate your options, including the interest terms and rates, and help you choose the one that works best for you. You’ll get the capital you need in as little as 24 hours so you can put the money to work for you and get back to growing your business. 

Know Your Rates, and Grow Your Business Today!

Interest rates are a key player in a business’ decision to choose specific loan types over others. But while they have a great impact, there are other significant factors that must be considered before you choose the best loan option for you.

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