Loan Against Property vs. Personal Loans
Taking a loan to fulfil certain personal responsibilities or for achieving a life goal is commonplace nowadays. You may need the money to fund an important event in your or your children’s lives (weddings, college fees, and so on), or in case of a grave and unexpected event (accident, illness). In these times, you would usually turn to banks or Non-Banking Financial Companies (NBFCs) to seek requisite funds. Contingent on the fact that you have a good credit history, the ideal credit rating, and the necessary documents, banks usually extend you a loan facility either as a Personal Loan or as a Loan against Property (LAP).
How are Personal Loans and Loan Against Property Similar?
Both these loan types are similar in the sense that they serve the same purpose. You can utilise the funds received through these loans for satisfying any sort of personal purpose. Though anyone who fits the banks’ eligibility criteria and furnishes the required documents could apply for such loans, these loans are a boon for the middle class, salaried people who may otherwise find it difficult to borrow a loan in the absence of a self-owned business and strong financial background.
Personal Loan and Loan Against Property – Similar But Not the Same!
Even though both types of loans help you satisfy similar objectives, they are quite different in nature and have vastly differing characteristics. This fact is best elucidated when you consider these key differentiators.
Presence/Absence of Collateral Security
The biggest difference between a Personal Loan and LAP is that while the former is an unsecured loan, the latter is secured by collateral security in the form of property. This key differentiation, in turn, brings a lot of other key differentiators into play.
Rate of Interest
Like all unsecured loans, a Personal Loan too bears a very high rate of interest. The absence of collateral security means that the lender is taking a greater risk by advancing the loan than he would if he were to disburse a secured one. This ‘additional’ risk that the lender bears has to be offset by a higher rate of interest.
For a LAP, the lender’s risk and the interest rate are minimal as he has collateral security to compensate for a default. In India, such loans bear an interest rate of around 9.25% to 18% while a Personal Loan is advanced for interest rates in the vicinity of 10.99% to 20%.
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Tenure and EMI Amounts
A Personal Loan is essentially a short-term loan which has to be repaid within a maximum of 5 years. LAP though is a medium to long-term loan with a maximum tenure of 20 years. The longer duration for a LAP means that the EMI amounts are lower for it than for a Personal Loan of a similar amount.
Loan Amount Determinant
For a LAP, the loan amount is sanctioned based on the value of the property that is extended as a security and the borrower’s income. The sanctioned amount generally equates to about 50% to 90% of the property’s value to a maximum of 100 Crores. The sanctioned amount for a Personal Loan, however, depends solely on the borrower’s income. The maximum amount you could borrow through a Personal Loan is capped at 50 Lakhs.
Processing Fees and Prepayment Charges
Most lenders charge 0.50% to 1.00% of the loan amount as processing fee for a LAP while Personal Loan lenders ask you to pay processing fees to the tune of 1.50% to 2.50% of the approved loan amount. If you borrow a LAP at a floating rate of interest, you are not required to pay any prepayment charges if you clear the loan before its tenure expires but Personal Loan prepayments do involve some charges.
Documentation and Processing Time
Personal Loan applications need supporting documents such as an address proof and an ID proof of the loan applicant along with a salary slip (for salaried applicants) or an ITR copy (for self-employed applicants) among other documents. Loan Against Property Documents also include the property documents besides the ones required for Personal Loans.
As a LAP application carries heavy documentation, it takes a longer time to process it. A Personal Loan, however, is processed instantly and the loan amount is disbursed within 2 days for an online application. Offline applications though could take about 7 to 10 days to be approved and disbursed.
Both types of loans have their own merits and demerits. While a Personal Loan is disbursed almost instantly, repaid in a shorter duration and could be borrowed without extending a security; a LAP bears a lower interest rate and provides a larger amount. Choose what works best for you!
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