Often people run out of funds, especially when they have an important event of life coming up for which they need money. Be it a child’s college fee, their marriage, or most unexpected – a sudden accident or illness. At such times, people turn to banks for loans. To borrow a loan, you must have assets to declare such as a property. But what if you don’t have a valuable asset to mortgage, will you be denied of obtaining a loan? Of course not!
This article shares the merits and demerits of availing loan against property and personal loan, for you to make an informed decision.
What is Loan Against Property and Personal Loan?
Loan Against Property (LAP) is self-explanatory. To avail this loan, you mortgage your property as collateral with the bank to obtain the desired loan amount.
Depending upon the documentations and your previous loan repayment record and credit history, you will be sanctioned a loan. The maximum sanctioned loan amount on mortgaging your property hovers between 40% and 60% based on the value of your property. Moreover, you can opt from fixed or floating interest rate.
Borrowing a Personal Loan (PL), on the other hand, is quick and easy and takes minimal time to process. You can borrow the desired funds but at a higher and fixed interest rate and with a shorter repayment tenure. Since PL does not require collateral, people often opt for it.
While both these loans can be used to pay off your expenses, but weigh the pros and cons of LAP and PL before making a decision.
1. Loan Disbursal
A Personal Loan is an unsecured loan, because it can be obtained without collateral. Consequently, it is processed within a few days. On the contrary, processing Loan against Property takes more time because banks have to verify all the property-related documents. Moreover, if the property has multiple owners, each must submit a no objection certificate (NOC) for loan approval, which further lengthens the processing time.
2. Processing Fee
For Loan against Property the processing fee is charged between 0.5% and 1.5% of the loan amount, while for Personal Loan, the fee ranges from 1.5% to 2.5%.
Know more details on: What are the fees and charges demanded in a personal loan?
3. Interest Rates
While the personal loan seems a very easy option, the interest rate levied on borrowing this loan ranges between 10.25% and 21%. On the other hand, the interest rates levied on a loan against property ranges between 12% and 14%. Since, the interest rates are lower on LAP because you have a property to mortgage, therefore it turns out to be is more efficient and cheaper as compared to personal loan.
4. Equated Monthly Installments (EMIs)
The longer tenure of loan against property as compared to personal loan results in lower EMIs. Moreover, the higher rate of interest of personal loan makes the borrowing more expensive.
5. Loan Tenure and Loan Amount
The sanctioned loan amount via LAP will depend on the value of your property, while PL will be given based on your income and financial status. The loan tenure of LAP is 15 years, while for the PL it is 5 years. As you have less time to repay the high interest of the PL as compared to lower interests of the LAP, thus latter is preferred for borrowing a higher amount.
6. Prepayment Charges
For prepaying loan borrowed against property on a floating interest rate, no pre-payment charges are levied. However, the banks charge an extra fee if you prepay your personal loan.
Know More on: Is prepayment of personal loan a good idea?
Loan Repayment
If you default on your personal loan, a higher interest rate is levied and your credit score is reduced. However, if you are unable to pay the loan borrowed within the tenure of loan against property, you stand a much greater risk — losing your property.
So, weigh the pros and cons carefully to judge, which loan will suit your better and not give you the stress for repaying it.