When seeking funds, which option should you choose a personal loan or a loan against property (LAP)? To decide between the two, it is important to understand each of these loan types individually. Both these loans can be taken for any purpose. The financial institutions do not restrict the end purpose of these loans. A property loan can be issued against a self-owned property (commercial, industrial, or residential).
Many use these loans for big-ticket purchases, wedding, travel, home renovation, medical treatment, education etc. But given that, there are also several differences between the two that are listed below:
- Unsecured and Secured Loan
A personal loan is an unsecured loan, which means the lending institution does not pose a requirement for a security or collateral. It may however ask for a guarantor if the finances of the applicant are unsatisfactory or the person is a first-time loan taker. On the other hand, mortgage loan in India is a secured form or borrowing, there the property the applicant owns serves as collateral. The property papers are kept with the fund provider till the loan and the interest amount are totally repaid.
- Loan Amount
The loan amount in a personal loan depends on your monthly income and credit score. In LAP, the same depends on your income and the property’s current market value. Usually, you can get up to 70% of the property’s market value, as the maximum loan amount, and thus the sanctioned amount can be up to several lakhs or crores. In a personal loan, however, the maximum loan amount can be up to Rs. 20 lakhs only. Thus, a property loan is suitable for a higher loan amount.
- Processing Time
As property loan is obtained by mortgaging own property, the bank/NBFC has to verify the documents related, and then disburse the amount. The lender will undertake the property valuation process by finding out the current market value of the property, study the ownership documents, check for any legal issue, judge your repayment ability etc. The processing time for LAP thus can take more than a week or two.
If you are looking for a quick loan, then a personal loan is a better option, since the bank only checks for your repayment capacity, necessary documents, and monthly income before disbursing the amount. Thus, you can get funds within 48-72 hours of loan approval.
- Interest Rate
The interest rate of a personal loan is usually higher than LAP. The latter carries a rate between 11% and 16%, and the interest rate for the former can be as high as 24%. Your credit score will highly influence the rate of interest when it comes to personal loans, than property loans.
- Loan Tenure
In terms of tenure, a loan against property offers up to 15-20 years for repayment, whereas the same for a personal loan is around 5 years. Though a loan for a longer tenure means more interest payout, it also lowers the EMI amount, and increases the affordability of big-amount loans. If you do not wish to take the loan for a longer tenure in LAP, you can always choose a shorter tenure in the same.
Thus, a loan against property is a better borrowing option than a personal loan in terms of the tenure, loan amount, and interest rest. It may take longer time to approve and process the loan, but you will receive the needed amount if you are eligible for the loan. So, if you are looking for affordable loan of a high amount, and sure to repay the amount in time, then LAP is ideal for you.