When Should You Consider Loan Against Property Over Personal Loan?
Sometimes, we encounter situations in life when we need instant monetary support. Most of us turn to banks for the funds we seek to meet the immediate requirement. Loan Against Property and Personal Loans are the two popular credit options offered by banks. However, you need to be careful before choosing an option in order to pick one which is most advantageous for you.
Comparison between Personal Loan and LAP
A Personal Loan is an unsecured loan that you can avail from a bank for personal use. Usually, these are short-term loans that you can use to meet wedding expenses, set up your business, construct a house, or pay off your debt.
Loan Against Property is a secured loan where the lender lends you money and holds your property as security until you repay the entire amount back to them. It is considered to be the second cheapest next to home loans in interest rates. You can utilize the funds for any purpose such as higher education, expanding your business, medical emergency, home renovation, or for any other purpose.
Reasons to avail Loan Against Property rather than Personal Loan
- Higher loan amount
As personal loans are unsecured, the loan amount would generally be limited. It is usually estimated based on your repaying ability and your income.
You can get a higher loan amount if you are keeping your property as security over your loan with the lender. If you are looking for a higher loan amount in comparison to what you will receive through a personal loan, then LAP would be the most convenient option.
- Lower Interest Rates
The interest rate on LAP is lower in comparison to a personal loan. This is because the risk of defaults is lowered. The interest rate generally varies from 9% to 13%.
Personal loans attract higher interest rates as there are risk factors associated with it. The interest rate is fixed depending on the credit score, employment, income, and location and usually varies from 10.5% to 23%.
- Longer Loan Tenure
LAP provides you longer tenure to repay the loan amount that you have borrowed whereas the repayment tenure is lesser in case of personal loans. Generally, the repayment tenure is 15 years in the case of LAP and 5 years in case of personal loans. If you have the resources to pay back the loan quickly, then you can opt for personal loans. However, if you need lower EMIs that won’t be a burden, then opt for Loan against property.
|Rate of Interest (%)||Tenure|
|LAP||Personal Loan||LAP||Personal Loan|
|Kotak Mahindra Bank||9.25-11.50||10.75||10 years||12-60 months|
|HDFC Bank||8.75-10.40||10.99-20||15 years||12-60 months|
|Axis Bank||11||4.35-16.35||10 years||12-60 months|
- Loan Processing
This is where personal loan shines in comparison to LAP. Processing is quite quick in case of personal loans. The amount is disbursed almost immediately soon after the approval from the lender. The repaying ability, credit score, and income of the borrower are the major criteria considered while loan processing.
The banks do a careful analysis of the property if a borrower is interested in availing LAP. This involves performing legal checks, internal checks, and also evaluation of the property worth. It would take around a month to obtain approvals. If you can afford to wait, then LAP would be worthwhile.
- Credit Score
A personal loan is an unsecured loan that attracts a higher interest rate in comparison to LAP. Your eligibility for a personal loan will mostly depend on your credit score.
In the case of LAP, your credit score will not have too big of an impact as you’re providing your property as security. If the tenure of LAP is longer than the personal loan, then it can improve your credit score. In both cases, the key to improving your credit score is consistent payment.
Which one is better?
You need to consider your precise financial requirement before choosing any loan option. How much money you require, what is the time-frame of repayment, monthly EMIs, and urgency of funds – you should consider all these before finalizing on the type of loan to go for.