Personal loan or loan against property: Which one is better?

Naveen KukrejaPaisaBazaarHemant Shukla, a middle class employee, is preparing for a grand wedding for his daughter. Although he is finding himself short of funds, he does not want that to become a hindrance in the requirements and appearance of the wedding. He was evaluating various personal loans offers to fill this gap when one of his colleagues suggested him to consider a loan against property (LAP) instead. He found out that LAP is cheaper and comparatively flexible vis-à-vis personal loans and hence, went ahead with it. Here’s how you can choose between the two. What is personal loan?Personal loan as the name suggests, is an unsecured loan that you can raise from bank for your personal use. There are no restrictions on the proceeds of the loan amount – you can use it to pay off your debt, construct a house, set up your business or even for your wedding etc. What is loan against property?A loan against property (LAP) is a secured loan disbursed against the mortgage of the borrower’s property. It can be residential property (either self-occupied or a rent), commercial property or even a piece of land. Just like a personal loan, there is no restriction on using the proceeds of an LAP. You can use the LAP proceeds to finance your child’s education and wedding, to build a home for yourself, to meet medical expenses, to buy personal or commercial vehicles and even to finance your business. How to choose between the two?•Processing time: As a loan against property is obtained by mortgaging the borrower’s property, the lender has to verify related documents before disbursing the loan. The lender may also undertake technical study to confirm the ownership of the property and find out its market value. In addition to this, you will be asked to submit documents supporting your income to judge your loan repayment capacity. This entire process can take anywhere between 15 to 30 days and hence, LAP is not suitable for those seeking quick disbursal of loans. Personal loans on the other hand, do not require any collateral. Lenders usually judge your application on the basis of your monthly income and credit score and hence, your application may get approved within 7 days. •Interest rates: Being a secured loan, the interest rates of LAP is usually lower than that of personal loan. This can be anywhere between 11% and 16%. In comparison, interest rates of personal loan can be as high as 24%. The main factor determining the interest rates in personal loans is the borrower’s credit score. LAP will suit those who are unable to get a good personal loan deal because of poor credit scores. •Tenure of loan: In case of LAP, the loan tenure can be as high as 15 years whereas the upper limit of personal loan is usually around 5 years. The longer tenure of loan repayment brings down EMI payouts, which increases the affordability of big-ticket loans. However, the flip side is that the longer tenure would also result in higher interest payout. Bank Name Rate of interest Tenure •Loan amount: In case of personal loans, your loan amount will primarily depend on your monthly income and your ability to service the loan. However, in case of LAP, the loan amount will depend on both the market value of your property and your income. Generally, the loan amount in LAP ranges between 40–70% of the market value of the property and the maximum loan amount can go up to several crores. In case of personal loans, the upper limit is usually around Rs.15–20 lakhs. Consider taking LAP in case you require higher loan disbursal. Although, LAP is a better option than personal loan in terms of interest rate, loan tenure and loan amount, it falls short in terms of processing time. Therefore, for people requiring funds at short notice, personal loan will be the only option. Also, the biggest risk associated with LAP is that the lender can confiscate your property in the event of your default in paying your dues. Therefore, make sure to self-evaluate your repayment capacity before opting for an LAP.