Personal Loan or Loan against Property – Which one to choose?

Meeting financial requirements isn’t really hard these days, with banks and NBFCs offering a host of products designed to aid and boost our finances, albeit at an additional cost. While monetary constraints often force us to utilize these products, there are often cases when we choose the wrong product to meet a particular need. Two of the most popular products used by people are personal loans and loans against property, with each offering unique benefits to borrowers.

Personal loan and its features:

A personal loan is like a “jack of all trades”, helping borrowers meet multiple financial requirements. One can use this loan to redecorate the house, go on a vacation, arrange a wedding, pay for education, etc., thereby making this the most popular option in the market. Typically, most banks have simple eligibility requirements for this, offering the loan to anyone who has a decent credit score and a reliable source of income.

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The features of a personal loan are highlighted below.

  • Multipurpose – This loan can be used for any legitimate purpose.
  • Loan quantum – Individuals can avail a loan amount as per their need and their repayment capacity, with most banks setting a cap based on certain parameters.
  • Flexible – The loan amount can be repaid through flexible EMIs, as per the financial stability of a borrower.
  • Documentation – Banks can insist on additional documents to verify the background of an eligible borrower.
  • Interest rates – Banks typically charge an interest on the basis of the base rate or MCLR, with personal loans attracting a higher rate, primarily because there is no security provided. Interest rates can range from 15% to 20% per annum, varying on a case to case basis.
  • Guarantor – Banks could insist on a guarantor before sanctioning a personal loan.
  • Tenure – A personal loan should typically be repaid within 5 years, with banks rarely offering an extension.
  • Processing fee – Processing fee can range between 1 to 2% of the loan amount, depending on the bank policies.
  • Security – Banks might not insist on any security for this loan.

Loan against property and its features:

A loan against property is a financial tool which can be availed by individuals in lieu of their property, i.e., by keeping the property as security in order to get the finance. The features of this loan are highlighted below.

  • Multipurpose – A loan against property can serve as a financial instrument to meet a number of needs, ranging from home improvement to financing a wedding, a holiday, etc.
  • Loan quantum – Individuals can avail a loan upto 80% of the property value, giving them an opportunity to avail higher amounts. This amount varies from bank to bank, with individuals typically assured a loan equivalent to 50% of the property value.
  • Flexible – A borrower can repay the loan through flexible EMIs.
  • Documentation – An eligible borrower will have to provide additional information like property details in order to avail this loan.
  • Interest rates – A loan against property comes at competitive interest rates, which typically range between 11-15% per annum.
  • Guarantor – Banks might not insist on a third party guarantor, primarily because of the property factor.
  • Tenure – A loan against property can have a tenure ranging between 1 to 15 years, depending on the bank offering this loan.
  • Processing fee – Most banks charge a processing fee which ranges between 0.50% and 1.50% of the loan amount.
  • Security – Borrowers will have to provide their property as security/collateral in order to avail this loan.

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Decision time – personal loan or loan against property:

Both personal loans and loans against property help us meet our financial obligations, albeit at different consequences. While a personal loans are a boon for individuals who do not own a property, if you are a borrower who has a property then a loan against property could serve you better. The primary advantages of a loan against property over a personal loan are mentioned below.

  • Faster – A loan against property is easier to avail, primarily because banks are willing to offer credit in lieu of property. A personal loan could take a longer time to be sanctioned, with banks verifying their credentials before sanctioning it.
  • Cheaper – A loan against property is essentially cheaper than a personal loan, with banks charging a lower interest rate. This is because of the security provided in the form of a property.
  • Repayment – A loan against property comes with a longer repayment tenure, making EMIs cheaper (albeit the period of repayment is more). This reduces the immediate repayment burden on a borrower.
  • Quantum – Borrowers who pledge their property as security are likely to get a higher loan amount compared to those who don’t. This is why personal loans come with a cap on the upper limit.
  • Processing – Apart from quicker processing, a loan against property also attracts lower processing fees.

Now all these points might make a loans against property seem ideal, but there are a few drawbacks to it as well.

  • Risk – Borrowers who fail to repay the loan are at a risk, with banks wasting no time in confiscating and selling their property to recover the loan amount. Individuals who do not wish to take this risk are better suited for a personal loan.
  • Property ownership – Banks insist on a property having clean titles before granting this loan. Individuals who own joint property might need to convince other owners before pledging their property.
  • Loan amount – Comparing the loan amount with the actual value of a property, one might feel let down, as banks do not offer loans equivalent to the market value. Also, in case of failure to repay the loan, the loss might be far more than the actual loan amount.

The final choice comes down to the individual and his/her requirements, with a loan against property making more sense if he/she has a property to offer as collateral, with no expected hiccups in repayment. A personal loan should be considered only if there is no property to pledge as collateral.