Loan Against Property vs Personal Loan: Which is Better?

Loans against property and personal loans both have no restriction of end-usage. you can use the loan amount for renovating your homes, business expansions, education, marriage, or any other personal purpose.

Although both these loans have the same objective, you often need clarification in selecting the type of loan between the two. This article will discuss loans against property and personal loans to help you choose the appropriate loan option. . 

First, let’s understand the meaning of both types of loans:

• Loan Against Property: This is a secured loan where the borrower has to pledge property to avail the loan. The lender has conditional ownership of this property until the loan amount disbursed is paid back. The property can be a residential property or any commercial property. One can use the amount for any purpose, such as a medical emergency, house renovations, etc.
• Personal Loan: It is an unsecured loan and does not require any pledge from the borrower. Instead, the lender checks the creditworthiness of the borrower, like credit score, monthly income, etc., before approving the loan amount. After that, the borrower can use the money for various purposes.

Differences Between Loan Against Property and Personal Loan

1. Loan Processing time

Personal loans are disbursed more quickly than any other type of unsecured loan. After submitting a loan application, it usually takes 2 to 7 days to disburse the loan amount.  Many lenders offer pre-approved personal loans based on the borrower’s credit history. Some lenders also provide a completely digital process for personal loans where disbursement happens within hours.

On the other hand, a loan against property can take up to 3 to 4 weeks to process the loan amount after the loan application is submitted. The lender verifies the property-related documents before approving the loan. Some lenders also conduct a technical study to verify the property’s market value. Generally, a lender appoints an independent valuator to evaluate the value of the property. Because of all these processes, the processing time slows down.

2. Loan Interest Rate

The interest rate for personal loans is high because it is an unsecured type of loan that increases the risk factor for the lender. The interest rate for personal loans ranges from 8-49%, and sometimes the interest rate depends on the borrower’s credit score, income, and employment.

Whereas in the case of a loan against property, the interest rate is much lower than that of personal loans. Because in a loan against property, the lender has little risk in case of payment defaults by the borrower. The interest rate ranges from 8-25% and depends on the tenure of the loan.

3. Loan Tenure

Most lenders allow a maximum of five years to repay the loan in the case of personal loans. However,  in loans against property, borrowers can get a much higher repayment time and a higher amount of loan. As a result, the maximum repayment tenure can go up to 20 years, depending on the loan amount disbursed. 

4. Loan Amount

The loan amount in personal loans is determined based on the borrower’s monthly income and credit score. The maximum amount sanctioned for personal loans can reach up to ₹40 to ₹50 lakh.

In a loan against property, the loan amount is determined based on the underlying property’s market value and the borrower’s income. Most lenders offer up to 60% to 70% of the property’s market value, and thus is a better option for those looking to borrow a larger amount.

5. Loan Processing Fees

A personal loan may incur a processing fee of 0-4% of the loan amount. However, in the case of a loan against property, the processing fee is much lower, ranging from .25%-3% of the loan amount.

6. Credit Score

Since a personal loan is an unsecured loan, these loans’ credit score requirement is high. On the other hand, a loan against property has comparatively a lower credit score requirement because the lender has the advantage of your collateral pledged against the loan amount.

Conclusion

The decision of personal loan vs loan against property depends on the needs and situation of the borrower. Overall, a loan against property is a better option as it provides more flexibility, a low-interest rate, and a higher disbursement amount subject to the property’s value. However, the borrower must also consider the following factors:

• In emergency and immediate need, a personal loan is a better option where you can get the money in less time.
• When you need a considerable amount with a longer repayment tenure and a low-interest rate, a loan against property is a much better option.
• Credit score can also be a deciding factor here. If your credit score is insufficient enough for a personal loan, you can opt for a loan against property.

Consider these factors carefully to make a better choice between the two.