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  • Loan Against Property vs. Personal Loan

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  • At some point in time, we may find ourselves in a situation where we are in dire need of cash. The purpose can be anything, ranging from emergency medical expenses to higher education. To meet those financial requirements, we may have many options at our disposal. However, two of the most sought-after paths are taking a loan against property and personal loan. In this article, we will look at the two and examine which one is better, based on certain key parameters.

    What is Loan Against Property (LAP)?

    As the name suggests, the loan, in this case, is taken against the property. The property, which can either be residential, commercial or a plot, is used as collateral to secure the loan. The proceeds of this loan can be used for any purpose.

    What is Personal Loan (PL)?

    A personal loan is an unsecured loan that one can avail from any financial institution or lender for personal use. The funds here can be used for any purpose, similar to that in loan against property.

    How the Loan Against Property different from Personal Loan?

    The two types of loans differ vastly when it comes to certain important parameters that one looks at while availing a loan. These parameters are nothing short of deciding factors and should help you evaluate which of the two options is more feasible for your situation.

    • Rate of Interest When it comes to availing a loan, the first thing that we look at is the rate of interest.

    A loan against property is a secured loan and as a result, the interest rates offered here are lower than those that come with personal loans. For a LAP, the interest rate can be anywhere between 11%-16% per annum.

    On the other hand, since no security is needed to avail personal loan, the interest rates, in this case, are generally high, ranging between 11%-24% per annum.

    Therefore, from the interest rate perspective, a loan against property is a superior option in comparison to personal loan.

    • Equated Monthly Installments (EMI)

    If the rate of interest is high, then the EMI sum that is to be paid is high. As a result, personal loan EMIs are much higher than its counterpart under loan against property.

    • Loan Tenure

    If you choose to take a loan against property, then you can repay your loan over a period of 5-15 years, depending on the bank and other factors. This works out to be quite feasible, especially if the loan amount is large. However, keep in mind that you will end up paying more interest.

    However, the maximum repayment period allowed to clear a personal loan is 5 years. This is ideal, provided the loan amount to be repaid is not high.

    • Quantum of Loan

    When it comes to loan against property, the loan amount will be 40%-70% of the property that is being used as collateral. This is suitable if you are in need of a larger sum. The loan amount can be in crores, depending on the value of the property.

    As for the personal loan, the loan amount will depend greatly on your monthly income, followed by other factors such as credit score, age, et cetera. A lender will sanction the personal loan depending on your ability to repay the sum. Hence, the quantum of the loan, in this scenario, is highly subjective. Nonetheless, the limit here can be anywhere between Rs.10-15 lakh.

    • Time to Process the Loan

    As mentioned earlier, a personal loan is an unsecured type of loan. Lenders will not ask you for any collateral and as a result, the processing time will be quick. All they will do is evaluate your monthly income and your credit score, which in turn, may lead to your loan application get approved in just a week.

    However, if you are taking a loan against your property, the approval time may be anywhere between 15-30 days. This is because the lender will check the authenticity of the property-related documents before releasing the loan amount. If the property has multiple owners, a no objection certificate has to be signed by every owner before the loan can be approved. Furthermore, you may be asked to submit an income proof to evaluate your loan repayment ability.

    • Failing to Repay the Loan

    If you fail to repay the loan that you have taken against your property, then you stand to lose the property that you have put as collateral. Hence, plan carefully before availing this particular type of loan.

    In the case of personal loan, the consequences of not repaying will lead to an increase in the interest amount that is to be paid. It may also affect your credit score negatively.

    The Following Table Summarises the Aforementioned Factors:

    Parameter Loan Against Property Personal Loan
    Interest Rate Low interest rates; 11%-16% per annum High interest rates; 11%-24% per annum
    Loan Quantum Depends on the market value of the property; 40%-70% of the property’s value Depends on the monthly income, credit score and the ability to repay the loan
    Loan Tenure 10-15 years, depending on the bank 1-5 years
    Processing Time Processing time is long since property-related documents are to be verified Processing time is short since no collateral is needed
    EMI EMI to be paid is significantly low, owing to low interest rates EMI to be paid is high, since the interest rates are high

    Hence, as you can see, personal loan and loan against property have their own set of pros and cons. If you are in need of a small sum urgently, then you should opt for a personal loan. However, if you need a large sum, then you should consider taking a loan against your property. However, the loan, in this case, will take some time to be approved.

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