At some point of time, most people find themselves in a situation where they are running short of funds. Whether they need the money to start a new business or to cover the education or even marriage expenses of their children, seeking a loan comes across as the most feasible solution in such cases. However, given the different types of loan options offered by the lending institutions, the borrowers often feel confused about making the right choice. This is especially true when they need to make a choice between availing a loan against property or personal loan. As is the case with almost every other financial product, both these types of loans come with their own set of advantages and disadvantages. Hence, in order to choose the best option, it is important to not only have an in-depth understanding of both these types of loans but also their pros and cons.
What is a Loan Against Property ?
As the name suggests, loan against property is a loan wherein the lenders give money to the borrowers while holding their property as collateral. It is a secured loan as the borrowers need to offer security in the form of property to the banks and financial institutions to get the desired loan amount. The property to be put up as collateral can be either the residential property, or a commercial one. The borrowers can even put up a piece of land as collateral for a LAP. The exact amount of loan that can be availed is generally within the range of 60-70% of the property value. However, this amount might vary depending upon the documentations provided by the borrowers, the previous loan repayment history and the credit score of the borrowers. There are no restrictions on how the borrowers choose to use the loan amount.
What is a Personal Loan ?
Personal loan is a type of unsecured loan that is generally offered to the borrowers at a higher interest rate. The loan does not require the borrowers to provide any collateral to the lending institutions and is offered on the personal guarantee of the borrowers. Just like LAP, the borrowers can use the loan amount for just about anything. The high interest rate is not the only consideration for borrowers considering this option as the banks also seek a good credit score to approve the loan. However, since the loan does not require any security, it is generally a more preferred option for a majority of loan seekers.
Factors Influencing Choice – Loan Against Property or Personal Loan
The decision of choosing the best option between loan against property and personal loan is usually based on a variety of factors. These factors are discussed in brief as follows:
1. Processing Time
In general the processing time for LAP is much greater than that for a personal loan from private finance in Delhi. This is because the lenders need to verify and evaluate the property documents before making a decision about approving or rejecting a loan. On the other hand a personal loan does not require any such verification and the lenders mostly use the information related to the monthly income and the credit score of the borrowers to assess their loan application. This results in cutting down the processing time for a personal loan by a significant margin.
2. Rate of Interest
In terms of the rate of interest, secured loans prove to be a better option than unsecured loans. This means that people seeking quick cash loans with a lower rate of interest are likely to find loan against property as their best bet. This is due to the fact that in case of a LAP, the lenders can easily mortgage the property of the borrowers to recover their money if there is delay in loan repayment. However, since personal loans do not have any such provisions, the lenders try to recover the maximum amount by levying a significantly higher interest rate.
3. Loan Repayment Time
This is yet another respect in which loan against property proves to be a better option than a PL. The repayment time for a LAP can be up to a maximum of 15 years. This naturally brings down the EMI amount and hence minimizes any chances of missing the payments by the borrowers. The maximum repayment time for a personal loan is generally 5 years. This combined with the high interest rate of a PL can become a major financial burden for the borrowers.
4. Loan Amount
The actual amount that the borrowers will get upon loan approval is an extremely critical factor in deciding the best loan option. In case of LAP the lenders consider both the borrowers’ income and the market value of the property they have put up as collateral, for deciding the actual loan amount. In case of a PL, the borrowers’ income, their ability to service the loan and their credit score are the key deciding factors.