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At one point in our lives, we may have taken out a loan for one reason or another. Some people take out specific loans because they want to purchase a major asset such as a car or a house. Others apply for a loan because they want to make major home improvements that need a massive overhaul. 

Whatever the reasons you have for taking out a loan, it is always best to borrow sensibly to avoid the pitfalls of borrowing. Let’s say that you have thought it over and have finally decided to take out a loan. It’s important to figure out what sort of loan would work best for your needs.

Business Loan vs. Personal Loan: What’s the Difference?

Two of the most popular types of funding options are business loans and personal loans. Both are meant for different purposes and will require different qualification criteria for you to be approved. Whichever type of loan you choose will impact your credit score differently. Here are the differences between the two: 

A personal loan can be used for just about any purpose, hence the term “personal.” As such, your creditors will ask you about the purpose of your loan and will look into your personal credit history. 

On the other hand, business loans can provide you funding for your business needs, whether it is purchasing new equipment for your manufacturing business or investing in new technology. Business loans can be short-term or long-term, and you will need to submit financial statements and financial projections for you to qualify. In general, business loans will be lengthier in the process because of the extensive documentation and paperwork required. 

Which Loans could work for your needs? 

A small business loan can be the solution to funding your business needs. Applying for one may mean that it has more restrictions regarding what it can be used for, which means that you use the funds for business-related purchases. Some of these would include hiring new employees, investing in new technology, or even covering your daily business expenses.

It’s best to take out a business loan when you feel that you need to expand your business and that the additional capital will generate more revenue. When you use your business loan responsibly, you can build up your businesses’ credit score and credit history, which can open doors for opportunities with new clients and even strengthen relationships with existing vendors. 

Personal loans can also be used to cover your business expense, albeit it being expensive. Most personal loans are unsecured loans, which means that it does not require any collateral. Forbes said that taking out a personal loan is best when you want to purchase big-ticket items such as a car or you want to consolidate high-interest debts like those on your credit card. 

Since creditors are taking a higher risk when lending you money, they will most likely charge you a higher interest rate depending on your credit score or your debt to income ratio. When you find that you have no collateral to offer or that your credit card limits aren’t enough to fund your needs, a personal loan might be the least expensive borrowing option for you. 

Personal loans could also fund medical emergencies, especially when you have mounting hospital bills. You can also opt for a personal loan when life throws one of its many curveballs like you, such as a car accident that totaled your car.

Whichever loan you choose, do not do so foolishly. While you might have personal reasons for applying for the loan, it’s advised that you don’t use your loan proceeds to fund an extravagant shopping spree or a luxury cruise. 

Before you take out that loan, remember to include the monthly payments into your budget and work on improving your credit score to avail of better interest rates. Do your research with different companies and find one that will work best for you. When money is involved, always read the fine print. It will take some analyzing, but it is better to do it now than have regrets later. 

For many people, applying for a loan will make the most sense, especially regarding their financing needs. Loans are useful, given the right reasons. However, remember that if you aren’t responsible with money, it is very easy to fall into financial ruin. Let not that be the case with you. Take great care when making decisions that can affect you financially so that you can avoid losing necessary resources.

By Richard