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26 May
  • Editorial Team
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In a rapidly growing economy with ever-increasing consumer spending, taking a loan has become very normal. 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. Whether it is 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, then you'll be able to appropriately deal with short notice opportunities & threats. In case not, then you should consider a Loan Against Property or Personal Loan, both of these loan types have their advantages and disadvantages. So which one is right for you?

Defining Loan Against Property and Personal Loans

Loan Against Property (LAP) is a loan type, which involves a collateral or security in the form of house/ property. The loan amount sanction is secured against the property being mortgaged and as a result one is able to get a higher loan amount.

Personal Loans (PL), on the other hand are very common and most people are quite familiar with them. These loans are unsecured, which means that they are not backed by a security or collateral. As a result of this the amount sanctioned is relatively lower. These loans are very common among salaried retail borrowers.

Differences Between Loan Against Property and Personal Loans:

1. Processing Time

Personal loans get processed faster than LAP, as the credit appraisal process is quicker, and requires fewer steps. LAP on the other hand takes longer, as the property evaluated by the legal and technical team which makes the processing slightly longer.

2. Interest Rates

As a thumb rule, unsecured loans are always more expensive that secured loans. LAP is secured against property, thereby offering lower interest rates. Personal Loans are unsecured and as a result have higher interest rates.

 3. Loan Tenure & Loan Amount

As LAP is a secured loan, the tenure for it can go up to 15 years. Personal loans on the other hand offers shorter tenures of a few months to a few years. The loan amount also tends to be higher for LAP (as its secured) and is directly proportional to the property being pledged. Personal loans are usually capped at 15-20 lacs.

4. Eligibility

The eligibility criteria for both of these is quite different, for personal loans, eligibility is determined based on the monthly income, however, for LAP, repayment capacity and property value play a key role. In addition, age, business vintage and profitability are also assessed before sanctioning

5. Documentation Required is Similar, except property papers which are exclusive to LAP

  • Address & Identity Proof
  • Income Proof
  • Financial Proofs (bank statements, IT returns, etc.)
  • Property papers (for LAP only)

Loan Against Property makes more sense, as it 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. While Personal Loans offer quick processing, this difference is reducing and is a one-time hindrance. The long term advantages of LAP far outweigh this inconvenience.

Did You Know

Disbursement

The act of paying out money for any kind of transaction is known as disbursement. From a lending perspective this usual implies the transfer of the loan amount to the borrower. It may cover paying to operate a business, dividend payments, cash outflow etc. So if disbursements are more than revenues, then cash flow of an entity is negative, and may indicate possible insolvency.

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