Are you in need of money to take care of expenses? You can find different loan options available in the market. Read on to know the pros and cons of taking a loan against your property as compared to personal loans.
While availing credit, it is paramount that you compare the various features of loan options you are considering. A loan taken against one's property (also called LAP) and personal loan are two of the most popular choices in India that people consider when they need money. Let us understand the difference between the two.
LAP and Personal Loans - Understanding the Basics
LAP is a loan taken against a residential or commercial property over which the borrower has outright, indefinite ownership. LAP is, therefore, considered a secured loan because your property is given as collateral.
Lenders are not required to give any collateral in Personal loans, and hence they are regarded as unsecured loans. However, your monthly income, age, and credit score will be considered before granting you the loan.
The Common Factor
The money you get through both loans can be used for any of your needs except for speculative activities. There are no stipulations that limit how you spend the money, unlike car loans, education loans, home loans and the likes.
However, this is where the similarities between both the loans stop. If you are confused about which loan type to go for, here are some key factors that may help you make an informed decision.
- Processing Time and Fee
Most lenders in India, promise disbursement of personal loan within minutes if you are an existing customer, and a few hours even for new customers. The processing time for LAP, on the other hand, can range from 15 to 30 days. The lenders assess the market value of the property depending on factors like the age and location of the property. The lenders also verify the property-related documents to ensure that the property is legal and is not involved in any disputes. Processing fee for LAP can be from 1.5 to 2% of the loan amount while it can be up to 3% for personal loans.
Verdict: If you need money urgently, then a personal loan can be your best bet. However, if you are okay waiting, then LAP promises a lower processing fee, especially if the loan amount is high as many banks usually have a cap on the processing fee for LAP.
- Interest Rates
The interest rate is probably the most important factor of a loan that most people consider before choosing the borrower. The typical interest rates of LAP range from 9 to 12% (depending on the lender). The interest rates may vary depending on the loan tenure and loan slab. Personal loan interest rates can range from anywhere between 12 to 21%.
Verdict: LAP has lower interest rates as compared to Personal loans because of the security of having a property as collateral.
- Loan Tenure
Usually, people avail loan against property for about 10-15 years or more. This gives the borrowers enough time to repay the loan. The personal loans, on the other hand, have shorter duration and in most cases, the maximum duration for repayment is five years.
Verdict: It may make sense to go for personal loans for your short-term needs, but if the amount needed is high, then you may opt for a LAP.
- Loan Amount
The maximum amount of loan you can avail through LAP can run into crores. This amount depends on your property and its valuation. Your credit score and existing loans (if any) will also be considered. Most lenders give up to 60% of the market value of the property pledged as collateral. However, this may further reduce if you don’t have any relations with the bank you are approaching for the loan.
The loan amount is much lesser in the case of personal loans with a maximum of around 40 lakhs. Your profession, age, work experience, credit score, and monthly income will decide your eligibility for personal loans.
Verdict: Personal loans are usually preferred for small amounts that can be paid off within a few years. However, if the loan amount needed is high for which you need more than 5 years, LAP may be a better option.
The last word
Both, Loan against Property and Personal loans, have their own benefits and drawbacks. Failure to repay LAP can lead to loss of your property. For personal loans, inability to repay can have a significant impact on your credit score. Further, you stand a chance to face legal proceedings from the bank.