Personal Loan vs. Loan Against Property: Differences

personal loan

We may find ourselves in a scenario where we require immediate financial assistance at some point in the future. Anything from emergency medical needs to higher education can be the reason for the loan. Many options may be available to us in order to achieve those budgetary needs. Taking out a loan against your home or a personal loan, however, are two of the most popular options. 

Both personal loans and loans against property have no end use restrictions imposed by lenders. Borrowers can utilize the loan funds for anything except speculative purposes, such as house renovations, business development, child’s education/marriage expenses, international travel, or other personal reasons. Because both types of loans achieve the same goal, most people are torn between the two.

A brief comparison between a personal loan and an LAP is provided here to help you make an informed decision.

What is a loan against property?

The loan in this scenario is secured by the property, as the name implies. The collateral for the loan is a property, which might be residential, commercial, or a plot. This loan’s proceeds can be put towards anything you like.

What is a personal loan?

A personal loan is an unsecured loan that can be taken out for personal purposes from any financial institution or lender. Similar to a loan against property, the cash can be used for whatever purpose you like.

Personal Loan vs Loan Against Property

Processing time

Personal loans have one of the fastest disbursement times of any loan kind. They are typically dispersed within 2 to 7 days of the loan application being submitted. Many lenders provide pre-approved personal loans to individuals that have a strong credit history. These loans are frequently dispersed within minutes of the loan application being submitted. Some lenders additionally provide an end-to-end digital process for personal loan applications and evaluations, resulting in faster loan disbursement for borrowers.

Interest rate offered

The provided rate of interest plays a significant role in the applicant’s decision-making process. Due to the higher amount of risk involved with LAP, the loan is issued at a lower interest rate than a personal loan. Because LAP is a secured loan, the financial institution charges a reduced interest rate on the amount disbursed. Financial companies also offer a floating rate option in LAP, which means that if interest rates fall, the benefit will be passed on to the customer.

Loan tenure

In the case of an LAP, the loan term typically ranges from 15 to 20 years, with some lenders giving loan terms as long as 20 years. Personal loans are typically for 5 years, with some lenders allowing payback terms of up to 7 years. Longer terms reduce EMI payments, allowing borrowers to take out larger loans. As a result, applicants who have been turned down for personal loans due to a lack of repaying capacity might opt for an LAP with a longer repayment period. Keep in mind, however, that a longer term will result in a higher interest rate.

Loan amount

Financial institutions benefit from a security in the form of a tangible asset because the applicant obtains LAP against property. As a result, they are prepared to take out a large debt. However, all due diligence is required, as well as the property’s current valuation and mortgageability. Personal loans have a much lower maximum loan amount, usually between 15-20 lacs, and are based mostly on the individual’s income.

Prepayment charges

Prepayment fees on personal loans or LAPs with fixed interest rates are allowed by lenders. The RBI, on the other hand, has prohibited lenders from charging prepayment costs on floating-rate loans.

Personal loan prepayment/foreclosure costs can be as high as 5% of the outstanding balance. Some lenders only allow prepayment after a particular amount of time has passed after the loan was first taken out. Prepayment penalties on fixed-rate LAPs typically range from 1% to 5% of the outstanding loan amount. If you want to pay off your loan early, personal loans or LAPs with adjustable interest rates are a good choice.

While both LAP and personal loans have their own set of benefits and drawbacks, the applicant can choose according to convenience, interest rate, processing time, and required amount.