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Difference between Personal Loans and Loan Against Property

Published on Aug 9, 2019Updated on Jan 12, 2024

Difference between Personal Loans and Loan Against Property

At some point in time, you may find yourself in a situation where you are in dire need of cash, whether it is to fund higher education or an emergency medical expenditure. To meet such financial requirements, you assess all the options at your disposal. The world of loans and financial instruments is riddled with jargon. It is easy to get perplexed amid the plethora of options available. It is highly likely though, that two options you will end up considering will be a loan against property and a personal loan.

Let’s look at the two alternatives across parameters and examine which one is better suited to your needs and situation.

First things first, let’s look at the scope of both the options. A personal loan is an unsecured loan that you can avail from any financial institution or lender for personal use. When you obtain a loan against property (LAP), you are using a piece of real estate you own, as collateral

So essentially, the choice you are making is about whether or not you want to involve an element of collateral security, and that is why it becomes crucial to look at other parameters.

What is Loan Against Property?

A secured loan, a loan-against-property (LAP), is a means of obtaining funds by pledging your property as collateral to the lending institution. This loan can fulfill needs like medical emergencies, big purchases, home renovation, education, etc. With this type of loan, you can receive financial aid by leveraging your property's equity. However, there is a risk that your assets may be seized if you cannot repay the loan.

What is a Personal Loan?

An unsecured loan, or personal loan, can be availed of without providing any collateral as security to the lending institution. Personal loans can serve various purposes, require minimal paperwork, and do not require an extensive verification process. This is why lending institutions can disburse the loan promptly, saving you precious time.

Loan Against Property or Personal Loan - Which One is Better?

When it comes to choosing between a loan against property and a personal loan, it largely depends on your individual circumstances. A personal loan may be helpful if you need instant funds. Being an unsecured loan, the need for paperwork is less, and it is disbursed quickly.

Conversely, a LAP, or loan against property, is a secured loan that lets you avail of larger loan amounts. However, these loans are approved only after thoroughly evaluating your financial capability and creditworthiness, which can be more time-consuming than a personal loan. Additionally, asset seizure is always risky in loan default cases.

Both loans come with their pros and cons. Ultimately, you have to pick one that suits you best.

Table for Comparing the Loan Against Property and Personal Loan

Characteristics

Personal Loans

Loan Against Property (LAP)

Time to Process the Loan

Quicker processing time

Longer processing time

Total Loan Amount

Up to INR 25 lakhs*

Up to INR 5 crores*

Repayment Tenure

Up to 5 years*

Up to 15 years*

Documents Required

  • Identity proofs
  • Income proofs
  • Residential proof
  • KYC documents
  • Bank statements
  • Documents about property

Key Differences Between Personal Loan and Loan Against Property

1 Interest Rates Offered:

The rate of interest is the first piece of information you look at when availing any loan.

A loan against property (LAP) is a secured loan and as a result, the interest rates levied on the disbursed amount here are lower than those that come with personal loans. The loan against property interest rates offered are very minimal and competitive.

2 Equated Monthly Installments (EMIs)

This follows from the first point. The logic is simple: if the rate of interest is high, then the EMI to be paid will also be high. As a result, personal loan EMIs are much higher than those under loan against property.

3 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 age, income, and other eligibility criteria. Which is reasonable and feasible, since lower EMIs mean higher disposable income for yourself. In the case of personal loans, the usual time period is between 12 and 60 months

4 Quantum of Loan sanctioned

Since LAP is secured against a physical asset, the loan amount will be 40%-70% of the property that is being used as collateral. And even though this is subject to due diligence, the amount is mostly higher than what personal loans allow. The maximum amount disbursed under personal loans is considerably lower, usually not exceeding INR 25 Lakhs*, and majorly depends on your income.

5 Time to Process the Loan

A personal loan has far less documentation and procedures involved, so it almost works on instant approval. All the bankers need to do is evaluate your monthly income and your credit score. You might have the funds with you in less than a week. However, if you are taking a loan against your property, the approval time is longer due to the due diligence procedures needed across the property-related documents and other formalities and legalities. A fortnight is the least stretch of time you should account for.

While both LAP and Personal loans have their own set of advantages and disadvantages, the applicant can take a decision basis the convenience, interest rate on offer, processing time and the amount required.

The best option depends on your emergency and the quantum of finance you would require. Medical emergencies can hardly wait, in which case you would go for a personal loan. This wouldn't be the case if you can afford to wait for a pre-planned medical expense to avail LAP at a low-interest rate and a longer tenure. Assess your needs on a case-by-case basis.

Conclusion

Choosing to avail of a loan against property or a personal loan comes down to your personal choices. While a loan against property allows you to borrow a larger sum by using your property as collateral, there is always the risk of losing your asset.

On the other hand, a personal loan allows quicker access to smaller amounts without collateral. It's important to consider your financial needs, risk tolerance, and repayment ability before deciding. Both loans serve different purposes, so it's advisable to choose wisely based on your specific requirements and current financial standing. Check out the details for both on her website.

* Please note that this article is for your knowledge only. Loans are disbursed at the sole discretion of SMFG India Credit. Final approval, loan terms, disbursal process, foreclosure charges and foreclosure process will be subject to SMFG India Credit's policy at the time of loan application. If you wish to know more about our products and services, please contact us

FAQs

What is a personal loan against property?

A loan against property is a secured loan where one can use their property as collateral for a larger loan amount.

What is the limit of loan against property?

Lending institutions can offer a loan against property up to 60%-75% of the property’s value.

How to calculate eligibility for loan against property?

A simple method to determine your eligibility for a LAP is by factoring in your personal information, nature of work, location, income, and creditworthiness. Additionally, the final valuation of your property will also be a determining factor for its suitability.

What is the minimum cibil score for loan against property?

A CIBIL score of 700 or higher is considered desirable for availing of a LAP.

Can an unemployed person get a loan against property?

This can be difficult, as lending institutions prefer applicants with demonstrated proof of repayment capacity.

What is the penalty for closing a personal loan?

The penalty for closing a personal loan varies based on individual lenders and loan terms. It can be a percentage of the remaining principal amount.

What type of loan is a loan against property?

A loan against property is a secured loan.

What type of loan is a Personal Loan?

A personal loan is an unsecured loan.

Is it better to take out a loan against property?

Taking out a loan against property is beneficial as it offers funds at lower interest rates and longer tenures. However, this comes with a risk of asset seizure in default cases.

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