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Personal loan vs Loan against property: Which Is Better?

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  • Highlights

  • Difference Between Personal Loan and Loan Against Property

  • When You Need More Money, a Loan Against Property is a Better Choice

  • Conclusion

What happens when you are in need for emergency funds and are not able to break into your savings? Of course, you have the option to take a personal loan from lenders but at what cost – high interest rates, smaller loan amounts and a short tenor to repay the loan. What if we told you that the more feasible option would be the loans against property?

In the past few years, these credit products have become quite popular. So, it is obvious that many people have been asking an important question – personal loan vs loan against property: which is better? In this article, we answer this very question.

Difference Between Personal Loan and Loan Against Property

Before we can answer this question, we must understand the difference between a personal loan and a loan against property.

A personal loan is a kind of loan in which the borrower does not have to provide any security to obtain the loan. Since the lender does not have any security which it can use to recover losses in case of default, personal loans often draw a high-interest rate.

A loan against property, on the other hand, is a secured loan that banks and NBFCs offer against a property. The property mortgaged stays as security with the lender until the borrower has paid off the entire loan. When it comes to loans against property (LAP), there are no restrictions regarding the purpose for which the funds availed of can be used. In simple words, one can use a LAP loan to finance a child's education or wedding, paying for a medical emergency, expanding one's business, etc. Loans against property loans are the second cheapest loans and draw a nominal rate of interest.

Now, coming back to our original question: personal loan vs loan against property - which is better? Read on to know the answer. The correct answer to this question depends on various factors.
Let us look at each of these factors separately.

When You Need More Money, a LAP Loan Is a Better Choice

If you need a high loan amount, a LAP loan is the better choice. Since personal loans are unsecured loans, banks and NBFCs do not generally approve a high-value personal loan. More importantly, the amount you can avail of will depend on your personal income as well as repayment capacity.

On the other hand, in most cases, banks and NBFCs release 70% of a property's current value as a home loan. Moreover, since LAP loans are secured loans, it is easier to get a high-value LAP loan approved over a high-value personal loan.

In Terms of Interest Rate, LAP Loans Are Clear Winners

Based on the loan interest rate obtained, the answer to the above question is the LAP loan. Personal loans draw a much higher interest rate than loans against property. While the interest rate on personal loans can go up to 24%, the interest on a LAP loan varies between 11% to 16%. While in both cases, one can negotiate for a better interest rate, especially if one can show high creditworthiness through high income, stable employment history, and clean repayment history, the negotiations work only to a certain extent. Thus, in terms of interest rate, LAP loans win the battle of LAP vs personal loans.

LAP Loans Have Longer Tenors Too

If you want to avail of a loan for the short term, you can opt for a personal loan. In the case of a personal loan, banks and NBFCs keep the tenor to a maximum of five years. On the other hand, the tenor for a loan against property can stretch up to 18 years. Thus, if you wish to take a loan for the long-term, opt for a LAP loan.

Personal Loans Have Shorter Approval Time than Loan Against Property Loans

If you are in urgent need of funds, apply for a personal loan. Banks and NBFCs approve personal loan as quickly as possible and the disbursal are carried out almost immediately after the approval is received. On the other hand, in the case of a loan against property, lenders approve a loan only after carrying out legal and technical verification of the secured property. The process involves several different steps and therefore, takes time. In some cases, a loan against a property can take up to a month to get approved. However, at Bajaj Housing Finance, we disburse the loan amount within 3 days* from the loan approval.

Personal Loans Lead to Better Credit Score

Personal loans are unsecured loans and are approved after assessing an applicant's income, credit history, and repayment capacity. Thus, these loans lead to a high credit score.

On the other hand, since a loan against property is a secured loan with a lower interest rate, it leads to a lower credit score when compared to a personal loan. If you want to increase your credit score through a loan against property, opt for a longer tenor.

Conclusion

So, what is better: loan against property or personal loans? The answer to this question, as explained above, will depend on your situation. If you need funds immediately, a personal loan is a better choice as these loans get disbursed within only a few hours. However, if you have some time and want to enjoy better interest rates and a longer tenor, you must most certainly opt for a loan against property. If you are planning to apply for a loan against property, we recommend using our mortgage loan calculator to figure out the right loan value and tenor for you.

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