Loan Against Property vs. Personal Loan: Which Should You Choose?

There could be several occasions when we find ourselves in need of funds. From renovating a home to funding a child's higher education, from a medical emergency to setting up a new business - there are a number of situations that prompt us to borrow from the bank or a reputed NBFC. In most cases, we opt for two common loan products: personal loans and loans against property.

Loan against property Vs. personal loan

The banking and financial system in our country is highly evolved, and specific loan products are available to meet nearly all our needs. However, loans against property and personal loans remain two of the most popular loan products offered by most financial institutions.

A loan against property is when you put up your land, flat, apartment, house, or even a commercial property that you own as collateral and borrow against it. This makes it a secure loan. On the other hand, a personal loan is unsecured, as it does not involve any collateral. Banks and NBFCs are more inclined to offer you a personal loan if you have a regular source of income and a high credit score.

Understanding the benefits of loans against property and personal loans is essential before you opt for a loan product.

Advantages of personal loan

Personal loans are a type of loan that does not require you to provide any collateral. However, this makes them a high-risk credit option for banks and financial institutions. As a result, you are more likely to be approved for a personal loan if you have a good credit history or a long-standing relationship with the bank. With a good credit score and the necessary documentation, obtaining a personal loan is a straightforward process.

One of the benefits of personal loans is that they typically have a short processing time and are disbursed quickly. Furthermore, the lender does not restrict how you can use the funds. This makes personal loans a convenient way to access funds in times of emergency.

Advantages of loan against property

If you own a residential or commercial property, you can borrow from a bank or credit institution by pledging this property as collateral. While a loan against property may require a longer processing time, typically used by the lender to scrutinise your ownership title and other documents, this loan offers other advantages.

One of the main benefits of a loan against property is that you can opt for more significant amounts of credit. The lender holds the property as security, allowing them to offer longer terms and lower interest rates. Also, since the bank holds the property as collateral, the bank or NBFC is more likely to provide a loan against property to a borrower with a low credit score.

Top-up home loans

Most home buyers opt for financing or home loans when they buy a property. This is also a form of loan against property since the new property remains mortgaged with the bank until the home loan is completely paid off. If you have an active home loan and require funds, opting for a top-up on your existing home loan may be a good idea. A top-up is usually easy to secure if you have been paying off your EMIs on time, and home loans are among the loan products with the lowest interest rates. Most banks and lending institutions do not place restrictions on the use of the money lent through top-up home loans.

When is it better to opt for a loan against property?

It is important to weigh the pros and cons of available loan products before applying. All things considered, the benefits of a loan against property far outweigh those of personal loans. The interest rate for loans against property can be considerably lower, and the term or tenor may be much longer. This reduces the EMI burden and makes it much easier to repay such a loan. If the loan against property is obtained as a top-up on an existing home loan, it also makes you eligible for applicable income tax deductions.

In Conclusion

When we need funds, we often resort to loans or credit products. To make an informed decision, comparing loan products from different lenders is advisable before opting for one. Personal loans have a shorter processing time, but repayment schedules can be rigid and do not offer any additional benefits. Loans against property, on the other hand, are easier to obtain and offer favourable terms, but it is crucial to remember that failure to repay the loan promptly can have serious consequences, such as a decline in credit score and the possibility of the lender seizing the property. Planning your finances carefully and making timely repayments in both cases is important.