What’s the difference between a consumer loan and a commercial loan?

There are many different lending options available to businesses and individuals.  When looking for funding it is important to understand the difference between commercial and consumer loans.  The biggest difference is who the borrower is for the loan.  Consumer loans are made to an individual. Commercial loans are made to a business. While both loan types offer ways for people to pay for big-ticket items over time instead of all at once in a big lump sum, there are many distinctions that can be made between the two.

What is a consumer loan?

A consumer loan is a loan given to customers for personal, family, or household purposes, or for consumable items such as a car, boat,or home.  Lending institutions are looking at three main things: cash flow, character, and collateral. A good cash flow tells the bank you’ll be able to repay the loan.  Consumer loans come in many forms – from credit cards to mortgages.  When applying for a consumer loan, the majority of the credit decision will be based on your personal financial history. These loans require an extensive process to obtain.  Lenders examine payment history, account mix, and credit age to determine an individual’s creditworthiness.  Consumers will need to produce pay stubs, credit reports, and / or tax returns.

Collections and derogatory accounts will impact a consumer’s creditworthiness and could keep a lender from approving the loan.  A lender can say no for any reason, however, there are several common reasons for denial of a loan.

1.  Poor credit history or credit score
2.  Co-signing of a bad loan
3.  Insufficient income to repay the loan
4.  Filing for bankruptcy in the past

Consumer loans most commonly come in the form of installment loans.  The installment loan is given by a lender in one lump sum and then it is paid back over time, usually in monthly payments.  The most common installment loans are mortgages, student loans, auto loans, and personal loans.  Lenders use the credit score and the debt to income ratio to determine the interest rate and loan amount that an individual qualifies for.  Once the loan is approved and the money has been distributed, there is generally no follow up needed by the bank as long as the payments are made as agreed upon.

What is a commercial loan?

Commercial loans vary and can be used for almost anything that a small or large business needs in order to operate or improve a business.  These loans can be helpful tools for owners looking to expand their inventory or buy new office space.  The loan amounts for small businesses can range from a few thousand dollars to over a million dollars.  When applying for a commercial loan, both your personal and business financial history will be evaluated.   Collateral is needed to secure repayment of the loan to the lender.

There are several popular commercial loan options available.

1. Installment loan – Just like with the consumer loan, this installment loan offers a lump sum of money all at once.  The business makes monthly payments to pay off the balance, interest, and fees.  Installment loans are excellent for expanding business operations or covering sudden unexpected expenses.
2. Lines of credit – This is similar to a consumer credit card.  A business line of credit makes sure that a business always has necessary funds available.
3. SBA loans – This Small Business Administration loan acts as a guarantor between lenders and small businesses.  The SBA offers small business funding through lenders with interest rates and terms that are more favorable to small businesses.  The SBA also guarantees a percentage of every loan in case the business fails to pay back the full balance.
4. Equipment Loans – These loans are specifically used to purchase business equipment needed to run the organization.  This loan will only cover the cost of the equipment and a lender may require proof that the loan was used appropriately.
5. Merchant advance – This loan is dependent on the relationship between the merchant and the business.  A business borrows money and uses it to buy products or services directly from that merchant.

Business owners must borrow responsibly.  They are putting the future of their business, as well as personal assets, at risk.  Be prepared to have insurance for the item being financed.  Additionally,  be prepared to send periodic financial statements to the bank.  No business will find funding options in the future if they default on a business loan!

While a consumer loan doesn’t necessitate a guarantor to be able to take out a loan, a commercial loan does.  A guarantor is an individual that guarantees the lender that the borrower will pay back the money.  Businesses usually need to sign themselves as guarantors.  This places both their personal and business assets at risk.  With a consumer loan, there is not a need for further follow up with the bank, as long as the payments are made.  A commercial loan may require businesses to submit annual financial reports to review.  This alerts the bank of any issues that could threaten payment of the loan.

Cash flow is the ultimate driver in deciding whether or not to approve a loan.  Whether seeking a consumer or commercial loan, responsible borrowing is crucial.  Before settling on any loan, research your lending options.  Be sure to read the terms of the loan.   Always strive to pay a little more than the minimum amount per month.

Jarrettsville Federal offers a variety of loan products to our customers.  Our loan decisions are made on site and our loan specialists provide personal service.  At Jarrettsville Federal our in-house processing capability allows us to completely manage your entire application, underwriting, and closing.  This eliminates delays and miscommunications and allows you to reach your goals faster and without mistakes.  We offer both consumer and commercial loans.  For more details contact us at 410-692-5151 or check out our website at https://www.jarrettsvillefederal.com/loans/.