Personal Loan or Loan Against Property? Which Is Better?

December 21, 2021 Mutual Fund

During a cash crunch or financial emergency, it can be challenging to arrange the funds on short notice. For such immediate requirements, most of us prefer taking a loan from a bank or Non-Banking Financial Company (NBFC). For specific requirements like purchasing a property or car, we know that we should opt for specific loans, such as a home loan or car loan. But, when in need of money for a medical emergency, clearing off other high-cost loans, child’s education or wedding, business expansion, etc., there are a plethora of options available, which can make a potential borrower perplexed. Choosing the right type of loan is crucial to get the maximum advantages from the loan.

Since banks and NBFCs aggressively promote unsecured loans like personal loans and business loans, there is an increased awareness about these types of loans. Moreover, opting for unsecured loans is very quick and easy, especially if you have a pre-approved offer. Thus, many individuals do not even consider other loan options that could be better and blindly avail of a personal loan.

However, when considering the various loan options available, people often do not realise the value locked up in their property. A Loan Against Property (LAP) can be a good option when you are in immediate need of a huge amount.

Now, to decide which of these loan options suits you the best, let’s see the comparison of both these types of loans so that you can choose the right one based on your requirements.

What is a Personal Loan?

A Personal Loan is a type of unsecured loan that is offered by banks and NBFCs without any collateral. Since the loan is sanctioned without any security, your income, credit history, and credit score play an important role in the approval or rejection of your loan application.

What is Loan Against Property?

As the name suggests, a Loan Against Property is a secured loan that is offered against collateral in the form of a fully constructed commercial or residential property without any other encumbrances. Moreover, it can be availed as a loan or overdraft.

Here’s a detailed comparison of Personal Loan and Loan Against Property:

1. Types of loans:

As already discussed, a personal loan is an unsecured loan that does not require any collateral. Whereas, Loan Against Property is a secured loan that requires a fully constructed residential or commercial property as collateral. Moreover, Loan Against Property can also be availed as an overdraft facility, which is not possible with a Personal Loan.

2. End-Use:

A borrower can utilise the borrowed funds of Personal Loan or Loan Against Property for any legitimate purpose. So, you can use the borrowed money for renewing your house, child’s education or wedding, vacation, medical expenses, business expansion, debt management, etc.

3. Rate of Interest:

The rate of interest on Loan Against Property ranges between 8.5% p.a. to 15% p.a., which is comparatively lower than the rate of interest on Personal Loans, which can be anywhere from 12% p.a. to 24% p.a. The interest rates of Personal Loans depend upon the lender, your repayment capacity, credit history, and credit score. Whereas, the interest rates of Loan Against Property depend upon the lender, value of a property, loan amount, and your repayment ability.

Some lenders offer personal loans at a fixed interest rate that remains constant throughout the tenure. Whereas, others offer a floating interest rate that will vary with the market movement. In the case of Loan Against Property, some lenders let the borrower choose the type of interest rate, which cannot be changed later. It is advisable to opt for a fixed interest rate only if there is a higher possibility of a constant increase in the rates of interest in the future.

4. The Loan Amount:

A Personal Loan is ideal for those looking for a small amount of loan. Most banks and NBFCs have a maximum personal loan amount cap of 15 to 20 Lakhs, depending on your income and repayment capacity. Whereas, a Loan Against Property is offered up to 50% to 70% of the property’s current market value. This margin is kept by all the lenders to be prepared for any fluctuations in the real estate industry. So, owning a high-value property ensures that you can borrow larger sums of money.

5. Loan Tenure:

In the case of a personal loan, the maximum loan tenure with most banks and NBFCs is up to 5 years. However, in some cases, if the loan amount is higher, lenders can extend the loan tenure up to a maximum of 7 years. A Loan Against Property can be availed for a longer tenure of 5 to 15 years, depending on the loan amount. So, if your fixed monthly expenses are high and/or you are already paying higher EMIs on other loans that you have, you can opt for the maximum loan tenure of 15 years to reduce your EMIs. However, a borrower needs to remember that a longer loan tenure period equates to higher interest outgo.

6. Credit Score:

As discussed above, your credit score and credit history play a significant role in your loan approval because the loan is offered without any security. Whereas, in the case of a Loan Against Property, most lenders do not check the credit score because the loan is backed up by the property. This makes a Loan Against Property the best choice for those who do not have a credit history or good credit score. However, depending on their policies, some lenders may require an average credit score to approve the loan.

7. Loan Process:

The personal loan process is quick and easy as it does not require any collateral. The loan can be disbursed within 5 to 7 days. Moreover, if you have a pre-approved or pre-qualified offer from a lender, you can get the disbursement in 5 minutes to within 24 hours! However, in the case of a Loan Against Property, the lender follows the due diligence procedures across property-related documents and other formalities, which can extend the loan approval process by approximately 10 to 30 days.

8. Other Charges:

Apart from the rate of interest, the banks and NBFCs charge several other fees for processing your loan and managing your loan account, such as processing fee, pre-payment charges, foreclosure charges, etc. The processing fee charged on a Loan Against Property is generally 0.5% to 1.5% of the loan amount. Whereas, in the case of a personal loan, it is 1.5% to 2.5% of the loan amount. However, many lenders offer discounts on the processing fee of personal loans during festivals and some may even charge a flat processing fee to their pre-approved customers.

9. The Result of Failing to Repay:

Since a personal loan is a high-interest loan, it can drastically affect your credit score. If you fail to repay the personal loan for any reason, it will build up a huge debt and also negatively impact your credit score. If your credit score becomes too low, you might not be able to get any other loan in the future.

Failing to repay your Loan Against Property can not only negatively impact your credit score, but there is also a chance of losing your collateral, i.e. property. In case you default, the lender holds a right to sell your property to recover the dues.

10. Documents Required:

You should check the lender’s official website or ask the bank representative to provide you with the list of required documents. Keeping all the documents handy will save your loan processing time. The lenders typically ask for the following documents:

• Documents required for a Personal Loan:

  • Identity Proof – PAN Card, AADHAR Card, Passport, etc.

  • Address Proof – AADHAR Card, Voter ID, Passport, Electricity Bill, etc.

  Income Proof –

  For Salaried Applicants:

  – Last 3 to 6 months salary slips and/ or latest bank statement

  For Self-employed Applicants:

  – Latest Income Tax Return (ITR) along with Computation of Income.

  – Last two years Balance Sheet and Profit and Loss Statement certified by a Chartered Accountant (CA).

  – Latest bank statement.

• Documents required for a Loan Against Property:

  The lender will require all the above-listed documents along with a copy of the property documents.

To Conclude:

You can use the borrowed money almost instantly with quick and easy access to funds through both these excellent types of loans. A personal loan helps you to manage the excess expenses and can be availed of online within a few minutes. Although this type of loan does not require any collateral or guarantor, you can end up paying a very high rate of interest and processing fee. We advise you to avail of a personal loan only in case of an emergency when you do not have any assets to pledge and you do not require large sums of money.

However, if you need a large sum of money for business or personal reasons, and own a property that qualifies for a Loan Against Property, then it is advisable to consider availing a Loan Against Property since the interest rate and EMIs are lower than a personal loan. However, a borrower should only consider availing of a Loan Against Property if they are confident about their repayment capacity, as, in case of a default, the lender holds the right to sell the property to recover the dues. Hence, it is not advisable to stake your primary property or home for a business requirement that involves a lot of risks.

Furthermore, before applying for any loan, you should compare the benefits, rates of interest, other charges, terms and conditions, etc. of all the suitable loan options and choose the one that offers maximum benefits.

This article first appeared on PersonalFN here