Loan Against Property vs. Personal Loan

In a rapidly growing economy, with ever-increasing consumer spending, taking a loan has become common. Especially, if you are a business owner or a self-employed professional, the dynamic and changing business environment makes it imperative for you to be ready at all times—be it for business expansion, plant/machinery acquisition or a simple raw material purchase for a large order. Usually, this readiness hinges on your cash or funding situation. If you are cash-rich, you'll be able to appropriately deal with short notice opportunities and threats. If not, then you must consider either a loan against property or a personal loan, since both have their advantages and disadvantages. Are you wondering which one could be the right option for you? Let’s look at both in detail:
 

Defining Loan Against Property and Personal Loans

A loan against property (LAP) involves collateral or security in the form of a house or property. The loan amount sanction is secured against the property being mortgaged and as a result, you can get a higher loan amount.

Personal loan (PL), on the other hand, is common and most people are quite familiar with them. This type of loan is unsecured, which means that they are not backed by security or collateral. As a result, the amount sanctioned is comparatively lower. These loans are quite common among salaried retail borrowers.
 
Now that you know the basic difference between a personal loan and a loan against property, let us look at the benefits and drawbacks of both lending options before discussing a personal loan vs. loan against property. 

Advantages of Loan Against Property

• High Loan Amount: 

A loan against property comes with a higher loan value. The lender evaluates the LAP amount or the loan-to-value (LTV) ratio after assessing your land or building’s current market value. Based on it and several other factors, you can get a maximum sum of up to Rs 15 crores.
 

• Longer Tenure: 

A loan against property comes with a maximum repayment tenure of 15 years. Borrowers can easily plan their budget and can repay their EMIs without facing any trouble. 
 

• Lower Interest Rate: 

When compared to other secured and unsecured loan forms, the LAP rate of interest is lower. Because of the type of collateral involved, the risk of lending is substantially lower in a loan against property. 
 

• Multi-purpose Loan: 

You can use funds from this loan for any purpose you want such as funding your children's education or marriage, medical emergencies, home renovation, and more.
 
Also Read: Documentation for Loan Against Property - What You Need to Know
 

Disadvantages of a Loan Against Property

• Property Risk: 

If the borrower fails to repay the loan amount for any reason, the lender has the right to sell the mortgaged property to recoup the outstanding dues. As a result, the risk of losing your property exists until the borrower fully repays the loan amount.
 

• No Tax Benefits: 

A loan against property does not have any direct tax benefits. Tax benefits are available if you are utilising the LAP funds for the purchase of a new home.
 

• Lengthy Process:

As a loan against property is a secured form of financing, the lender assesses your property papers and inspects the property by sending representatives to the location. All of these procedures take time. As a result, if you require an immediate loan disbursement, LAP is not a suitable option.
 

Advantages of a Personal Loan

 

• Collateral Free Loan:

Unlike secured loans, borrowers don't need to put their valuables as security to get a personal loan. Personal loans are unsecured forms of financing and are available based on the borrower's credit history. 
 

• Minimal Paperwork:

Nowadays, most lenders disburse personal loans either through an online app or through their websites. You don't need to furnish a pile of papers to get your loan approved. Simply check your eligibility using a personal loan EMI calculator, submit your KYC documents and income proof and get instant approval. 
 

• Debt Consolidation:

Personal loans are easily accessible and are cheaper than credit cards and few other loan forms. Borrowers can use this loan for debt consolidation. If you have many high-interest loans, take a personal loan to pay them all off at once.
 

• Multiple Usages:

Personal loans are favourite among borrowers since you can use them for several purposes. You can avail of a personal loan to finance a marriage or to fund an overseas trip. Lenders do not put any restrictions or guidelines on fund usage.
 

Disadvantages of Personal Loans

 

• High Interest: 

As personal loans are unsecured forms of financing, they come with a higher interest rate. Depending upon your profile, the personal loan interest rate can range between 12% and 24%. 
 

• Unnecessary Debt Burden: 

As personal loans are easily available, you may end up taking this loan for an unnecessary purpose. The borrowing will ultimately increase your debt burden, and you will end up paying a higher interest rate for a purpose that may be avoided or met in another way. As a result, think about why you are borrowing money before taking a personal loan.
 

• Shorter Tenure:

If your needs are higher and you are looking for a financing product that comes with longer repayment tenure, then a personal loan is not a great option for you. As in a personal loan, you cannot extend your personal loan maximum tenure beyond 60 months. Moreover, many lenders have a strict policy on personal loan part prepayment and foreclosure.
 
Also Read: Top Mistakes to Avoid While Taking a Loan Against Property
 

Personal Loan vs. Loan Against Property–Which is Better?

Since both loan forms come with their own share of pros and cons, it is very important to weigh each option against your needs. Here are some common comparisons:
 

Parameters	Loan Against Property	Personal Loans
Processing Time	As the legal and technical team evaluates the property, the processing time is slightly longer.	You can get personal loan approval within minutes
Interest Rate	A loan against property interest rate is lower when compared to all other loan forms.	Personal loans come with a higher interest rate.
Loan Amount	Depending upon your property, you can get up to Rs 15 crore.	Depending upon your profile, you can get up to Rs 5 lakh. The maximum amount may vary from lender to lender
Loan Tenure	The maximum repayment tenure is 15 years.	Repayment tenure can range anywhere between 12 months and 60 months.
Documentation	Along with your KYC and income proof, you also need to furnish property-related documents.	You only need KYC and income proof.

 

To Conclude:

A loan against property (LAP) offers greater flexibility, lower interest rates, higher loan amount, and longer repayment tenure. All of these advantages make LAP a great choice for business owners and self-employed professionals. On the other hand, personal loans offer quick processing and minimum documentation.

Disclaimer: This post was first published on 26th May 2017 and has been updated for the latest information, freshness and accuracy.