We all will go through an event or situation for which we might need money. Most of us prefer the banks and NBFCs to seek funds to meet the immediate requirement. While personal loans and loan against property are the two popular credit products, one will have to choose carefully which one can be more advantageous.
What is Loan Against Property?
As the name implies, it is a secured loan where the lender lends you the money and holds your property as security until the entire loan is repaid. It is the second cheapest loan after home loans. You can use the funds for any purpose like expanding your business, wedding, house renovation, medical emergency etc.
What is a Personal Loan?
A personal loan is an unsecured loan where the borrower does not have to pledge any security to obtain the loan. The funds can be used for various purposes like wedding, education, travel, medical emergency etc.
Loan Against Property Vs Personal Loan
When you are given the option of both the loans, a careful study is required to choose the one that saves you a lot and also suit your requirement.
As loan against property is a secured loan, you can get a higher loan amount. Generally, up to 70% value of the property is provided as the loan amount. If your requirement is huge, this could be a convenient option to get a lump sum.
As a personal loan is an unsecured loan, the loan amount is usually limited. It is determined based on your income and repaying ability.
When compared to personal loan, the interest rate on loan against property is lower as the lender has low risks in case of defaults. The interest rate on loan against property ranges between 11% to 16%.
The interest rate on a personal loan could be higher which can be as high as 24% due to the risk factors associated with it. The interest rate is fixed based on your credit score, income, employment and location.
Along with higher loan amount, you can also get longer tenure with the loan against property. The tenure can be up to 15 years. However, the longer tenure will result in high outgo on interest.
In a personal loan, the tenure generally can be up to 5 years. it is preferable if you want to quickly close the loan.
This is the part where personal loan scores over loan against property. In a personal loan, the processing is quick, and loans are disbursed immediately after it is being approved by the lender. Only income, credit score and repaying ability of the borrower are considered as major criteria while processing the loan.
In a loan against property, the banks do a careful study on the property that the borrower wants to pledge to secure the loan. It consists of internal checks, legal checks and evaluation of the value of the property. It could take around a month to get it approved.
As a personal loan is an unsecured loan comes with high interest rate when compared to loan against property, you can get a high credit score on a personal loan. In loan against property, the lender has the advantage of your collateral and interest rates are lower than the personal loan, hence it might get you a credit score lower than a personal loan.
If the tenure on the loan against property is longer than the personal loan, it can gain you a better credit score. However, in the both the cases, consistent repayment is the key to getting a good credit score.
Which Is Better?
The best option depends on your emergency and the quantum of finance you would require. If you want funds for an urgent requirement such as medical treatment, a personal loan could be a good option as it is disbursed within 3 days after application.
For getting good terms, low interest rate, longer tenure and high loan amount, a loan against property is a preferred option.