Loan against Property vs Personal Loan – What is Better?

January 10, 2022

Loan against Property vs Personal Loan

Loan against property and personal loans are two of the most common options facilitating credit options that come from two totally different categories – secured and unsecured loans. While both have certain boons and banes, one cannot apply for one of them without ensuring the alignment between their offerings and your requirements. If you are on a rampage to find the perfect loan between these two, then there is no alternative to reading through each and every aspect of both. 

This section aims to help you pick your side in this loan against property vs personal loan confusion.

Let’s begin!

What is Loan Against Property (LAP)?

A Loan Against Property or LAP is a secured loan in which the individual provides their residential or commercial property as collateral to the bank or NBFC to avail the amount. The collateral is safer-kept by the lender until the entire loan amount is paid. This loan is sanctioned upon pledging of an immovable asset which makes it one of the most preferred loan options among those who want a bigger loan amount. 

Purposes for which LAP makes an ideal choice are 

  • Higher education of children
  • Setting up a business
  • Medical reasons
  • Consolidation of debts

This loan is also a favourite among many individuals as it solves the purpose at a significantly lower rate of interest. Besides, it stays for a repayment tenure of about 20 years alongside budget-friendly EMIs. Banks and NBFCs usually go up to the loan amount for 70% of the property value. However, LAP can take up a long processing time and make one wait for a long time before getting sanctioned as it involves property evaluation. 

Key Facts About Loan Against Property

  • LAP against a mortgaged property: You can avail this secured loan against a property on which you already have an outstanding loan. Know that a number of factors are taken into account by lenders before they let you enjoy this option. For instance, you can qualify for this loan if you have paid a higher down payment for the property. Additionally, the lender offers this option for a limited time.
  • It keeps you from enjoying tax exemption: You read that right! LAP does not let you revel in any tax benefits. However, if you have availed it against an already mortgaged property then you can try to claim deductions. 
  • Interest rate is floating: Banks and NBFCs levy a floating rate of interest on the loan against property throughout the loan tenure. While the rate of interest ranges between 8% to 12%, the final rate varies from lender to lender. 
  • You don’t pay any extra charge for part/full prepayment: It is very common for lenders to charge an extra fee in the name of prepayment if you opt for this option. However, LAP is a loan in which you need not make extra payments to pre-close the debt. 
  • Co-applicants- The co-owners of your property are required to be co-applicants as you apply for LAP, if there are any. The lenders require you to do so to make sure that you are applying for the loan with their consent. 

What is Personal Loan (PL)?

Personal Loan or PL is one of the popular bees in the clan of various loan types for a legion of reasons. It comes from the category of unsecured loans where the loan amount is availed on the basis of an individual’s credit score. If we compare it with the loan amount provided in LAP, then you will find a huge difference. Yet, this loan is counted on as a first choice as it addresses the personal financial requirements at a very plain-sailing procedure.

Here are the usual reasons why a personal loan makes an ideal option for borrowers 

  • An alternative to paycheque
  • Debt consolidation
  • House renovation
  • To fund vacations
  • Purchase of an item such as furniture, a gadget etc.

It is to be noted that the lenders only approve personal loans for the reasons that are enlisted in their criteria. A personal loan amount can be as little as INR 50,000 and it goes up to INR 5 lakhs generally. Personal loan EMIs are, in most cases, higher than LAP EMIs as they come with shorter repayment period options that, at maximum, last to 5 years.

Key Facts About Personal Loan

Here are the crucial facts (interesting or not) to know about the personal loan –

  • No Collateral is required: Personal loans are unsecured which means that you don’t have to pledge any asset or security in order to get it. However, you do have to have a good credit score which is the foremost thing a lender takes into consideration while processing your application.
  • Hard to get: As you know that the personal loan eligibility is determined after the credit assessment, your application can end up being rejected if your credit score fails to impress the criteria. 
  • They are fast: Since there are no property papers or other security documents to evaluate in this loan, it gets sanctioned within a week given that your credit score looks good. 
  • Interest rate is fixed: Personal loans are provided at a fixed rate of interest which can be a friendly aspect for you as you do not have to worry about the hefty hikes that occur in the case of floating rates and your budget does not get disturbed. 
  • Faster repayment options: Personal loan repayment tenure ranges from 6 months to 60 months which means that you wrap the loan up faster, if you would like to. However, if your loan amount is high then it can also cause you to fit larger EMIs into your budget.

Major Differences between Loan against Property and Personal Loan

While you know what these types of loan mean, you need to look at each and every aspect closely to conclude the loan against property vs personal loan confusion.

Let us differentiate between loan against property and personal loan taking a hand from the predominant factors. 

Processing Time

When you are seeking a loan to pace up with your financial requirements, you obviously don’t want to opt for the one that makes you wait for ages. It is the type of loan that largely directs the amount of time taken for sanction. So yes, the processing time is one of the eminent differences between loan against property and personal loan.

A Personal loan comes at faster processing as compared to the loan against property. It is because of the steadfast credit assessment with minimum formalities in the former. On the other hand, LAP demands more time as the evaluation procedure in this one involves a thorough analysis as well as legal check-ups on the property front.

Rate of Interest

Not that you have to say that you are looking for low-interest-studded-loan. Nobody wants to spend years paying off expensive debt when there is room for a cheaper one to reserve. 

Speaking of which, a personal loan is costlier than a loan against property. It is because a PL is an unsecured loan and has more risk on its side. The credit evaluation in a personal loan is only based on the credit score factor and ultimately takes a hand from a higher rate of interest. 

On the other hand, a loan against property is a secured loan in which you are getting the money by pledging your property. Thus, you will always have it at a lower interest rate compared to personal loans.

If we talk in the figures that usually lenders go with then a personal loan costs about 11% to 24% rate of interest while a loan against property can be enjoyed at competitively lower rates that range from 11% to 16%. Besides, you can choose between the fixed and floating rate of interest.

Please note that there are many factors including your credit score, loan amount, loan tenure, option to choose the type of interest rate (fixed or floating) and yes- your relationship with the bank that has a big say in the final interest rate. 

Loan Amount

When the credit score does not pass the assessment and you are applying for a huge loan amount then you can count on a loan against property. LAP makes for the best suit in cases when an individual wants to avail a higher loan amount for a long repayment tenure. 

You cannot expect a personal loan to give a financial hand that goes more than the amount of INR 15 to 20 lakhs and even for this much amount, you have to have the green light on your credit score – thanks to its unsecured loan of a nature. 

Loan Repayment Tenure

Since loan against property amount is higher, it comes with a long and quite easy-headed tenure. The personal loan repayment tenure goes up to 5 years for the highest, given the amount it offers. 

It all makes the personal loan EMI higher compared to LAP as the former features shorter tenure and individuals have to repay the loan in minimum time. A loan against property EMIs is shorter as the tenure for it stays for a long period. 

Now, it all boils down to the increased interest rates in LAP because the long tenure ultimately means higher disbursement of the rate of interest. 

Processing Fee

The processing fee has a role to play in the role, even if it is small. A loan against a property usually incurs a processing fee ranging from 0.5% to 1.5% of the total loan amount. On the other hand, a personal loan processing fee brings a processing fee that ranges from 1.5% to 2.5% of the loan amount. 

Documentation

The documents required for both types of loans for the application process do not differ from each other much except for one checkpoint- property documents for LAP. Apart from that, both require you to present the following documents-

  • Proof of income 
  • Proof of identity 
  • Address proof
  • Bank details
  • Income Tax Returns

Loan Disbursal

Personal loan is decided based on the income and credit score of the applicant which means that one needs not provide any security. Therefore, the loan disbursement can be done within a week. 

The loan against property amount is decided on the basis of the property that is being pledged as the lenders usually offer up to 70% of the property value. It means that the loan amount can compute in crores in this case making it a perfect solution for the ones who want a high amount. 

Given this case, the lender has to inspect each and everything related to the property (documents, owner’s details etc.) with a sharp eye. Thus, LAP ends up being a time-consuming and lengthy procedure. 

EMI

A loan against property will prove to be a budget-friendly option for you as it has a lower rate of interest. It is less risky, given that this loan is approved in the exchange of a property as collateral. A personal Loan is an unsecured loan and this is the reason backing the high interest rates it comes with. 

And then, LAP has longer repayment tenure ranging upto 20 years and PL tenure lasts up to 5 years. As a result, LAP proves to be a sound deal because of the shorter EMIs while a personal loan gets you to pay your EMIs in comparatively larger portions, making a costlier addition to your monthly budget.

Credit Score

A personal loan (PL) is an unsecured loan with a higher interest rate, hence paying timely dues will drastically boost your credit score. Though the regular payment of dues in both cases will always keep your credit score healthy which may eventually help you in case of loan requirements in the future.

Prepayment

Longer EMIs may bring relief to your monthly financial numbers but in a run so long they will only be profitable for your lender and definitely not you, given interest rates which you will be paying for a long run.

To settle the score and save your wallet from additional splurge, you can opt for the prepayment facility that is provided by banks and NBFCs. In this, you can choose to prepay the loan amount which will eventually prevent the cost of interest rate. 

But that’s where another major difference between both types of loans enters.

While personal loan prepayment usually comes with an extra charge.  On the other side, the lenders charge a fixed prepayment fee for a loan against a property. Apart from that, there is no such fee in the case of LAP at a floating rate of interest. 

Loan Against Property vs Personal Loan

Factors Loan against Property Personal Loan
Type Secured Unsecured
Purpose

To meet higher expenses such as an expensive medical treatment, pay for children’s higher education or marriage etc. 

Personal reasons that require less amount such as purchase of goods and items, fund vacations, Debt consolidation, etc. 

Rate of Interest

8% to 16% 

Between 11 to 24%

Tenure

Up to 5 years

Up to 20 years

Loan Amount

Up to 70% of the property value

Ranges between INR 50,000 to INR 5 lakhs

Processing Fee

0.5% to 1.5%

1.5% to 2.5%

EMIs

Usually shorter due to long repayment tenure options

Larger EMIs due to shorter repayment periods

Best Loan Against Property Options

Bank Rate of Interest Loan Amount Tenure
State Bank of India 8.40% p.a. onwards  Up to INR  7 crores