Personal Finance

Personal loan or loan against property?

Naveen Kukreja | Updated on October 13, 2019 Published on October 13, 2019

Loan against property fares better on most parameters; disbursal time is a drawback

Personal loan and loan against property (LAP) are similar in nature as they come without any restriction on the end-use of the loan proceeds. You are free to use the loan amount to finance your home renovation, child’s education/marriage, business expansion, overseas travel or any other personal requirement, except for speculative purposes. As both the loan types serve the same purpose, many borrowers face a dilemma when it comes to choosing between the two options.

Here is a brief comparison between the two to help you take an informed decision.

Processing time

Personal loans have one of the fastest disbursals among all loan types. They are usually disbursed within two to seven days. Some lenders also claim disbursal within the same day of applying. On the other hand, the processing of LAP can take anywhere between one and three weeks as lenders have to verify all property-related documents before disbursal. They will also have to undertake a technical study to confirm the ownership of the property and its market value. These processes take time, thereby slowing the approval process.

Interest rate

Being secured in nature, the interest rate in LAP is generally lower than that in personal loan, ranging anywhere between 9.65 per cent and 15 per cent. In comparison, personal loan interest rate ranges between 11 per cent and 26 per cent. Usually, applicants with a credit score of lower than 750 have less chances of getting a personal loan or they have to settle for one with relatively higher interest rate.

As lenders have the option of selling the underlying collateral in case of a default in LAP, they usually take a more relaxed view of credit score and other parameters while evaluating LAP applications. Borrowers who have been denied a personal loan or offered one with relatively higher interest rate may consider LAP.

Loan tenure

The loan tenure in case of LAP usually goes up to 15 years, whereas the upper limit for personal loan is usually five years. A longer loan repayment tenure can bring down your EMI payout and, thereby, increase your affordability for big-ticket loans. Therefore, those who have been denied a personal loan for the lack of repayment capacity can consider LAP with longer tenure. A longer tenure will eventually lead to higher interest outgo.

The loan amount in a personal loan would essentially depend on your monthly income and the ability to service the loan. Most lenders usually lend up to ₹20 lakh, while a few lend up to ₹40 lakh.

The loan amount in the case of LAP will depend both on your property’s market value and your income. Usually, the loan amount goes up to 60 per cent of the market value of the property. LAP will be a better option in case you are looking for a higher loan amount.

Prepayment charges

Whenever you prepay a personal loan or LAP availed at a fixed rate, you will incur prepayment charges. However, lenders do not charge any prepayment penalty on personal loan or LAP availed at floating rates.

Usually, prepayment/foreclosure charge for personal loan is up to 5 per cent of the principal outstanding. Some lenders allow prepayment only after completion of a certain period of the tenure. Prepayment penalty for LAP usually goes up to 1.5 per cent only.

Thus, prefer personal loans or LAP at floating rates if you are planning to prepay your loan. In case you are going in for personal loans at fixed rates, opt for a lender who charges minimal prepayment fine.

Though LAP is a better choice compared to personal loan if one were to consider the interest rate, loan tenure and loan amount, it falls short in terms of disbursal time.

Personal loan would be the better option for those requiring funds at relatively shorter notice.

The writer is CEO and co-founder, Paisabazaar.com

Published on October 13, 2019
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