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If you’re looking to start or grow a side hustle or small business, you might think a business loan is the right next step. A personal loan, however, is another popular financial product that you also might be able to use. For instance, by using it to free up some cash elsewhere in your budget, you could put more of your income toward funding your business.

Because there are potential benefits and disadvantages to both types of financing, it’s important to understand the differences. You’ll find that information here and be better equipped to decide whether a business loan vs. personal loan might work best for you.

What Is a Personal Loan?

A personal loan is a source of financing that a borrower typically can use for just about any legal personal purpose. That said, you typically cannot use the money from a personal loan directly for your business. You might instead use the lump sum to consolidate credit card debt, which could free up funds in your overall budget to put back into your business.

Typically, you’ll find unsecured personal loans, with the borrower agreeing to pay back the full amount, plus interest, in fixed monthly payments within a predetermined time frame.

Some lenders also offer secured personal loans, however,which means some form of collateral is involved. Also, some offer personal loans with variable interest rates.

How Personal Loans Work

When you apply for a personal loan, you can expect the lender to review your personal financial information — including your credit score, credit reports, and income — to determine your eligibility. In general, the better your credit, the better your chances of receiving a lower interest rate.

Personal loan amounts vary, but some lenders offer personal loans for as much as $100,000.

Although most personal loans have shorter repayment terms, the length of a loan can vary from a few months to several years. Typically, they last from 12 to 84 months.

What is a Business Loan?

A business loan is a type of financing used specifically to pay for business expenses. It could be used to purchase equipment or inventory, for example, or to fund a new project.

There are many kinds of small business loans available — with different rates and repayment terms — including Small Business Administration (SBA) loans, equipment loans, micro loans, and more. Rates, terms, and loan requirements also can vary significantly depending on the lender.

How Business Loans Work

Applying for a business loan tends to be more complicated than getting a personal loan. For one thing, you’ll likely have to submit more paperwork to back up your application, including your business’s financial statements and an up-to-date business plan. The lender also usually will want to review your personal and business credit scores. And you may have to be more specific about what the loan will be used for than you would with a personal loan.

If your business is brand new, lenders may be reluctant to give you a business loan. Some lenders might ask you to put up some type of collateral to qualify.

Differences Between Business and Personal Loans

There are several factors you’ll want to understand when considering the difference between a personal loan vs. a business loan, including the loan costs, how you plan to use the money, and how much you hope to borrow. Here’s a look at a few basic differences.

Cost Differences Between Business and Personal Loans

Whether you’re considering applying for a business loan or a personal loan, it’s important to be clear about how much it could cost you upfront and over the life of the loan.

Interest Rates

Interest rates for business loans can be lower than for the interest rates for personal loans, but the rates for both can vary depending on the type of loan, the lender you choose, and your qualifications as a borrower.

Fees

Fees also can affect the upfront and overall cost of both personal and business loans, so it’s a good idea to be clear on what you’re paying. Some of the more common fees for business loans and personal loans that you might see include origination, application, packaging, and underwriting fees, and late payment and prepayment penalties.

Some fees may be subtracted from the loan amount before the borrower receives the money. But fees also may be folded into a loan’s annual percentage rate (APR) instead, which can increase the monthly payment.

Down Payment

Business loans may be available for larger amounts than a personal loan. For a larger business loan — a substantial SBA loan or commercial real estate loan, for example — you could be required to come up with a down payment. This amount can add to your upfront cost. However, just as with a mortgage or car loan, a larger down payment can help you save money over the long term, because you’ll pay less in interest.

Whether you’ll need a down payment, and the amount required, may depend on your individual and business creditworthiness.

Different Uses for Business and Personal Loans

One of the biggest differences between business vs. personal loans is the way borrowers can use them.

•   A business loan can be used to finance direct business costs, such as paying for supplies, marketing, a new piece of equipment, business debt consolidation, or a business property. But it typically can’t be used for indirect business costs, which means a borrower can’t pay off personal debts with the money or buy personal property with it.

•   Some business loans have a very specific purpose, and the borrowed money must be used for that purpose. For example, if you get an equipment loan, you must buy equipment with it. Or, if you get a business car loan, you must buy a business car with the money.

•   With a personal loan, you have tremendous flexibility in how you use the loan, although that usually does not include business purposes. Rather, you can use a loan to pay off credit card debt, fund a home improvement, or pay an unexpected medical or car repair bill. Personal loans are typically smaller than business loans, and they generally come with a shorter repayment term. It can be helpful to have a clear intent for how the money will be spent and to keep separate records for business and personal expenses.

Differences When Applying for Business and Personal Loans

The criteria lenders look at can be very different when approving a small business loan vs. a personal loan. Here’s what you can expect during the application process.

Applying for a Personal Loan

When you apply for a personal loan, your personal creditworthiness usually plays a large role in the application and approval process.

•   Lenders typically will review a borrower’s credit scores, credit reports, and income when determining the interest rate, loan amount, and repayment term of a personal loan.

•   Generally, you can expect to be asked for a government-issued photo ID, your Social Security number, and/or some other proof of identity.

•   You also may be asked for proof of your current address. And the lender will want to verify your income.

Applying for a Business Loan

When you apply for a business loan, your personal finances still will be a factor, though other aspects of your application will be reviewed carefully.

•   The loan underwriters also will evaluate your business’s cash flow, how long you’ve been in business, your profitability, the exact purpose of the loan, trends in your industry, your business credit score, and more.

•   The lender may ask for a current profit-and-loss statement, a cash-flow statement, recent bank statements and tax returns for the business, your business license and a business plan, and any other current loan documents or lease agreements you might have.

•   You also will have to provide information about your collateral if you are applying for a secured loan.

Recommended: Understanding Credit Score Ranges

Structural Differences in Business and Personal Loans

Knowing the differences in how personal loans vs. business loans are structured could help you decide which is right for you and your business. A few factors that might affect your choice include:

Loan Amount

A business loan may be more difficult to apply for and get than a personal loan, especially if your business is a startup or only a few years old. But if you can qualify, you may be able to borrow more money with a business loan. While personal loan amounts typically top out at $50,000 to $100,000, some SBA loans can go as high as $5.5 million.

Loan Length

You’ll likely find personal and business loans with both short and long repayment terms. But generally, personal loans have shorter terms (typically one to seven years), while some business loan repayment periods can be up to 25 years.

Tax Advantages

If you have a business loan, deducting the interest you pay on the loan may be possible when filing income taxes if you meet specific criteria.

With a personal loan, it might get a little more complicated. If you use the borrowed money only for business costs, you may be able to deduct the interest you paid. But if you use the loan for both business and personal expenses, you would only be able to deduct the percentage of the interest that was used for qualifying business costs.

And you should be prepared to itemize deductions, documenting exactly how you spent the money. Your financial advisor or tax preparer can help you determine what’s appropriate.

Support

Along with the traditional banking services you might expect to get with any type of loan, a business loan also may come with operational support and online tools that can be useful for owners and entrepreneurs.

Risk

When you’re deciding between a personal vs. business loan, it’s also a good idea to think about what could happen if, at some point, the loan can’t be repaid.

•   If your business defaults and it’s a business loan, the impact to your personal credit would depend on how the loan is set up.

◦   If you’re listed as a sole proprietor or signed a personal guarantee, it’s possible you could be sued, your personal and/or business credit scores could take a hit, and your personal and business assets could be at risk.

◦   If your business is set up as a distinct legal entity, on the other hand, your personal credit score might not be affected — but your business credit score could suffer. And it could be more difficult for you to take out a business loan in the future.

Pros and Cons of Business Loans

There are advantages and disadvantages to keep in mind when deciding whether to apply for a business loan vs. personal loan.

•   A business loan can be more difficult to get than a personal loan, especially if the business is new or still struggling to become profitable.

•   If you qualify for a business loan, you may be able to borrow a larger amount of money and get a longer repayment term.

•   A business loan also can make it easier to separate your business and personal finances. {Personal loans typically can only be used for personal expenses, as the name indicates.)

•   There could be fewer personal consequences if the business defaults on the loan.

Recommended: Can You Refinance a Personal Loan?

Pros and Cons of Personal Loans

A personal loan vs. business loan can have advantages and disadvantages to consider.

•   Personal loans can offer borrowers more flexibility than business loans in terms of usage, though those uses must typically be for personal expenses, such as paying for a home renovation or a vacation.

•   They’re generally easier to qualify for and may have lower interest rates.

•   One major hurdle may be that you cannot use them for any business expense in most situations. You could use them to free up cash in your budget which you might then apply to a business purpose.

Is a Business or Personal Loan Right for You?

Considering the differences between a personal loan and a business loan can help you decide which is right for your needs. You may want to do some online research, compare rates and terms, and/or ask a financial professional or business mentor for advice before moving forward with this important decision. Here are some things to think about as you look for a loan that’s a good fit for your personal and professional goals.

A business loan may make sense if:

•   You’re seeking a lower interest rate and/or repayment term.

•   You want to keep personal and business expenditures separate.

•   You’ve been successfully running your business for a while.

•   You need more money than you can get with a personal loan.

•   You hope to build your business credit.

•   You want to limit your liability.

A personal loan may make sense if:

•   Your goal is to use the money for personal purposes, which might free up funds in your budget for business expenses.

•   You plan to use the money for both business and personal expenses.

•   You can find a personal loan with a lower interest rate than a comparable business loan, and the lender approves the loan for business expenses.

•   You want to get the money as quickly as possible.

•   You are seeking a shorter repayment term.

•   You don’t want to secure the loan with collateral.

•   You feel confident about your personal ability to repay the loan.

Recommended: Can I Pay Off a Personal Loan Early?

The Takeaway

If you’re seeking funding to start or grow your business, you may decide to apply for a business loan. Another approach: You might apply for a personal loan, which could be used for personal purposes, freeing up money in your budget that could go toward your business. Personal loans are typically easier to apply for and offer quicker access to funds, but often at a somewhat higher interest rate and shorter term vs. business loans. Also, business loans usually offer significantly higher loan amounts and the interest can be tax-deductible. It’s worthwhile to consider the tax and credit implications of each type of loan too, among other factors.

FAQ

Are business loans more expensive than personal loans?

Business loans typically have lower interest rates than personal loans. However, these two loans aren’t interchangeable: one is for business uses, the other for personal expenses.

Can I use a personal loan for business?

Most (but not necessarily all) personal loans can be used for just about any personal use. Check the fine print, and follow the lender’s guidelines.

Are startup loans personal loans?

There are a few different options for funding a startup, including SBA loans, family loans, or crowdfunding platforms. But if you have good credit and are confident you can make the monthly payments, taking out a personal loan could be an effective strategy for funding a startup, if the loan permits that usage.

Photo credit: iStock/MicroStockHub

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SOPL-Q425-040

Investors usually need to pay taxes on their stocks when and if they sell them, assuming they’ve accrued a capital gain (or profit) from the sale, and the shares are held in a taxable account.

But there are other circumstances when stock holdings may generate a tax liability for an investor: for example, when an investor earns dividends.

This is important for investors to understand so that they can plan for the tax implications of their investment strategy.

An important note: The following should not be considered tax advice. Below, you’ll learn about some tax guidelines, but to fully understand the implications, it’s wise to consult a tax professional.

Do You Have to Pay Taxes on Stocks?

Broadly speaking, yes, investors need to pay taxes on their stock holdings when they sell them for a profit, and when they’re selling shares within a taxable account. Selling stocks in a tax-deferred account, such as an online IRA or 401(k), does not trigger tax on profits from the sale (though withdrawals will be taxed).

The type of tax you need to pay on profit from the sale of a stock depends on how long you’ve held the stock, your income, and filing status. This applies when you’re investing online and through a traditional brokerage firm.

Typically, investors need to pay capital gains tax when they sell a stock — the sale of which usually triggers a taxable event in the form of either a gain or a loss. The main question is: when do you need to pay taxes on stocks, and what else, besides a sale, could trigger a taxable event?

When Do You Pay Taxes on Stocks?

There are several scenarios in which you may owe taxes related to the stocks you hold in an investment account. The most well known is the tax liability incurred when you sell a stock that has appreciated in value since you purchased it. The difference in value is referred to as a capital gain. When you have capital gains, you must pay tax on those earnings.

Capital gains have their own special tax levels and rules. To get a sense of what you might owe after selling a stock, you’d need to check the capital gains tax rate for 2025 or 2026 – more on that below.

You will only owe capital gains tax if your investments are sold for more than you paid for them (you turn a profit from the sale). That’s important to consider – especially if you’re trying to get a sense of taxes, fees, and ROI on your investments.

There are two types of capital gains: Short-term gains and long-term gains, and they’re taxed at different rates.

Short-Term Capital Gains

Short-term capital gains occur when you sell an asset that you’ve owned for one year or less, and which gained in value within that time frame. These gains would be taxed at the same rate as your federal income tax bracket, so they’re important for day traders to consider.

Short-Term Capital Gains Tax Rates for Tax Year 2025

This table shows the federal marginal income tax rates, by filing status and income bracket, for tax year 2025, which apply to short-term capital gains (for tax returns that are usually filed in 2026)

Short-Term Capital Gains Tax Rates for Tax Year 2026

This table shows the federal marginal income tax rates, by filing status and income bracket, for tax year 2026, which apply to short-term capital gains (for tax returns that are usually filed in 2027).

Long-Term Capital Gains

Long-term capital gains tax applies when you sell an asset that gained in value after holding it for more than a year. Depending on your taxable income and tax filing status, you’d be taxed at one of these three rates: 0%, 15%, or 20%.

Overall, long-term capital gains tax rates, according to the IRS, are typically lower than those on short-term capital gains.

Long-Term Capital Gains Tax Rates for 2025

The following chart shows the long-term capital gains tax rates, by income bracket and filing status, for the 2025 tax year, according to the IRS.

Long-Term Capital Gains Tax Rates for 2026

The following table shows the long-term capital gains tax rates for the 2026 tax year by income and status, according to the IRS.

Capital Losses

If you sell a stock for less than you purchased it, the difference is called a capital loss. You can deduct your capital losses from your capital gains each year, and offset the amount in taxes you owe on your capital gains. Note that short term losses must be applied to short term gains first, and long term losses to long term gains first.

If your losses exceed your gains for the year, you can also apply up to $3,000 in investment losses to offset regular income taxes.

Tax-Loss Harvesting

The process mentioned above – which involves deducting capital losses from your capital gains to secure tax savings – is called tax-loss harvesting. It’s a common technique often used near the end of the calendar year to try and minimize an investor’s tax liability.

Tax-loss harvesting is also commonly used as a part of a tax-efficient investing strategy. It may be worth speaking with a financial professional to get a better idea of whether it’s a good strategy for your specific situation.

Recommended: Stock Market Basics

Taxes on Investment Income

You may face taxes related to your stock investments even when you don’t sell them. This holds true in the event that the investments generate income.

Dividends

You may receive periodic dividends from some of your stocks when the company you’ve invested in earns a profit. If the dividends you earn add up to a large amount, you may be required to pay taxes on those earnings.

Each year, you will receive a 1099-DIV tax form for each stock or investment from which you received dividends. These forms will help you determine how much in taxes you owe.

There are two broad categories of dividends: qualified or ordinary (nonqualified) dividends. The IRS taxes ordinary dividends at your regular income tax rate.

The tax rate for qualified dividends is the same as long-term capital gains: 0%, 15%, or 20%, depending on your filing status and taxable income. This rate is usually lower than the one for nonqualified dividends, though those with a higher income typically pay a higher tax rate on dividends.

Interest Income

This money can come from brokerage account interest or from bond/mutual fund interest, as two examples, and it is taxed at your ordinary income rate. Municipal bonds are an exception because they’re exempt from federal taxes and, if issued from your state, may be exempt from state taxes, as well.

Net Investment Income Tax (NIIT)

Also called the Medicare tax, this is a flat rate investment income tax of 3.8% for taxpayers whose adjusted gross income exceeds $200,000 for single filers or $250,000 for married filers filing jointly.

Taxpayers who qualify may owe interest on the following types of investment income, among others: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, and income from businesses involved in trading of financial instruments or commodities.

Recommended: Investment Tax Rules Every Investor Should Know

When Do You Not Have to Pay Taxes on Stocks?

Again, this is a discussion to have with your tax professional. But there are a few situations where you may not pay taxes when selling a stock.

For example, if you are investing through a tax-deferred retirement investment account like an IRA or a 401(k), you won’t have to pay taxes on any gains when trading stocks inside the account.

However, with all tax-deferred accounts, withdrawals after age 59 ½ are subject to ordinary income tax. Withdrawals prior to that age could incur a penalty, in addition to being taxed.

4 Strategies to Pay Lower Taxes on Stocks

Do you have to pay taxes on stocks? While you’ll typically be subject to tax on any gains you realize from selling shares, there are some strategies that may help lower your tax bill.

Buy and Hold

Holding on to stocks long enough for dividends to become qualified and for any capital gains tax to be in the long-term category because they are typically taxed at a lower rate.

Tax-Loss Harvesting

As discussed, utilizing a tax-loss harvesting strategy can help you with offsetting your capital gains with capital losses.

Use Tax-Advantaged Accounts

Putting your investments into retirement accounts or other tax-advantaged accounts may help lower your tax liabilities.

Refrain From Taking Early Withdrawals

Avoiding the temptation to make early withdrawals from your 401(k) or other retirement accounts.

Taxes for Other Investments

Here’s a short rundown of the types of taxes to be aware of in regards to investments outside of stocks.

Mutual Funds

Mutual funds come in all sorts of different types, and owning mutual fund shares may involve tax liabilities for dividend income, as well as capital gains. Ultimately, an investor’s tax liability will depend on the type and amount of distribution they receive from the mutual fund, and if or when they sell their shares.

In addition, if an investor holds mutual funds in a tax-deferred account, capital gains won’t be taxed.

Property

“Property” is a broad category, and can include assets like real estate as well as land. The IRS looks at property the same way, from a taxation standpoint. In short, profit from selling a property is subject to capital gains taxes (not to be confused with property taxes, which are paid separately). In effect, if you buy a house and later sell it for a profit, that gain could be subject to capital gains taxes (although there are exclusions on gains, up to certain amounts).

Options

Taxes on options trading can be confusing, and tax liabilities will depend on the type of options an investor has traded. But generally speaking, capital gains taxes apply to gains from options trading activity — it may be wise to consult with a financial professional for more details.

The Takeaway

For most investors, paying taxes on stocks involves paying capital gains taxes after they sell their holdings, or paying income tax on dividends. But it’s important to keep in mind that the tax implications of your investments will vary depending on the types of investments in your portfolio and the accounts you use, among other factors.

That’s why it may be worthwhile to work with an experienced accountant and a financial advisor who can help you understand and manage the complexities of different tax scenarios.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

FAQ

How much tax do you pay on stocks?

How much an investor pays in taxes on profits from selling stocks depends on several factors, including any applicable capital gain, how long they held the stock, and whether they received any income from the stock, such as dividend distributions.

Do you get taxed when you sell stocks?

Yes, investors who sell stocks at a profit may generate a tax liability in the form of capital gains taxes. If the investor has generated a capital loss as the result of a sale, they can use the loss to offset tax liabilities generated by other capital gains.

How do you avoid taxes on stocks?

There are several strategies that investors can use to try and avoid or minimize taxes on stocks, including utilizing a buy-and-hold strategy and tax-advantaged accounts.