Both personal loan and loan against property are similar in nature as they do not come with any restriction on the end usage of the loan proceeds. You are free to use their loan proceeds to finance your home renovation, child’s education/marriage expenses, business expansion, overseas travel, or any other personal requirement except for speculative purposes. However, as both loan types serve the same purpose, many face a dilemma in choosing between the two options.
Here is a brief comparison between personal loan and loan against property to help you take an informed decision.
Personal loans have one of the fastest disbursals among all loan types. Disbursal of such a loan takes place in 2 to 7 days. Some lenders also claim to disburse the loan proceeds within the same day. The processing of a loan against property, may it be from any lender like Citibank loan against property or Axis Bank, it can take anywhere from 1 to 3 weeks as lenders have to verify all your property related documents before disbursing the loan. They will also have to undertake a technical study to confirm the ownership of your property and its market value. All these processes take time, thereby slowing the loan approval process.
Being secured in nature, the interest rate of LAP is generally lower than personal loans. This usually ranges between 9.65% and 15% p.a. In comparison, the interest rate of personal loans usually ranges between 11%-26% p.a. Usually, applicants with a credit score of less than 750 or scoring poor on other eligibility parameters have lower chances of loan approval or if approved, at much higher rates. As lenders have the option of selling the underlying collateral in case of a default in a LAP, they usually take a more relaxed view of credit score and other parameters while evaluating LAP applications. Thus, those denied a personal loan or charged higher interest rates for it due to their low credit score can consider LAP.
The loan tenure in the case of LAP usually goes up to 15 years, whereas the upper limit for a personal loan is usually around 5 years. A longer loan repayment tenure can bring down your EMI payouts and, thereby, increase your affordability for big-ticket loans. Hence, those who are denied personal loans due to a lack of repayment capacity can consider LAP with longer tenures. However, remember that longer tenure will lead to higher interest payouts.
Your loan amount, in the case of a personal loan, will essentially depend on your monthly income and your ability to service the loan. Most lenders usually lend up to Rs 20 lakhs, with a few lending up to Rs 40 lakhs.
The loan amount in the case of LAP will depend both on your property’s market value and your income. Usually, the loan amount in LAP goes up to 60% of the market value of the property. Hence, consider LAP if you are looking for a bigger loan amount.
When you may prepayment of your loan against property or personal loan at a fixed rate, you incur a charge called a prepayment penalty. However, lenders do not charge any prepayment penalty on a personal loan or LAP availed at floating rates. Usually, prepayment/foreclosure charges for personal loan range anywhere up to 5% of the principal outstanding. Few lenders permit you to prepay just after completing a specific loan period tenure. However, the prepayment penalty in the case of LAP usually goes up to 1.5%. Thus, prefer personal loans or LAP at floating rates if you are planning to prepay your loan. In case you are availing of personal loans at fixed rates, choose the lender charging minimal prepayment/foreclosure penalty.
Though a loan against property is a better choice as compared to a personal loan basis the interest rate, loan tenure and loan amount, it falls short in terms of disbursal time. Hence, a personal loan would be the better option for those requiring funds at short notice. Also, remember LAP comes with a risk of your lender taking over the possession of your underlying property in the event of a default. Therefore, make sure to carefully consider your repayment capacity before opting for the LAP tenure.
Also, ensure that no matter what decision you make, whether to avail loan against property or personal loan once you have zeroed on the loan type. The next important thing you must do is compute the loan proceeds that you would require and search for the best lender offering the required loan option at the best terms and conditions and interest rate. Never go for the very first lender that you approach or the lender with whom you already share a long-term good relationship. Always ensure to approach the online lending marketplaces and input your requirements. Such marketplaces will fetch you results based on your requirement. Once you know the lender, ensure to compute the EMI as per your preference. To compute the EMI as per your preference, you can use the online personal loan EMI calculator in case you decide on opting for the personal loan orloan against property EMI calculator in case you zero on loan against property option. Ensure to visit the trusted lenders’ online site to compute the EMI and interest constituent as per your cash flow and repayment capacity. Ensure that in the calculator, you can also make changes to the inputted variables to derive results as per your preference. The variables required by such online calculators to compute your EMI are usually your required loan proceeds, offered interest rate and the preferred repayment tenure. While you cannot make any changes to your offered interest rate as it is set by the lender depending upon your credit profile, you can definitely try out various permutations on the inputted loan proceed and the repayment tenure to compute an outcome that you are satisfied serving as per your current income flow and repayment potential.