Loan Against Property vs. Personal Loans: What makes sense?

Sep 2018 | Team Rubique

Who doesn’t want the perfect wedding for their children?

Who doesn’t want to give of the best quality education available to their children?

However, the things that plague these dreams is money which is required to fund these specified events. The perfect wedding, the best college or the best of anything or overcoming a sudden untoward incident, these things can only be can only be taken care of when you have the specified amount in your pockets or bank accounts. Moreover, what if you don’t?

In this case, we always turn towards banks to give us loans. Loans – monetary aid provided by a bank, secured or unsecured, which it recovers over a period of time with the additional rate of interest – act as a backbone to each and every event of your life where you are financially plagued. Now, loans are of many kinds but the two most commonly taken loans are Loans against Property(LAP) and Personal Loans. Both these loans are different in nature with their technicalities. Let’s look at both of these.

What is Personal Loan?

This is a kind of unsecured loan which you can raise from the bank for personal use. You can use it for anything ranging from paying off debt to constructing a house to using it for your children’s marriage. There are no restrictions on the amount of the loan sanctioned. The bank sanctions personal loan based on the ability of the borrower to repay the loan. Which means the bank analyses the credit history and monthly income of the borrower before sanctioning the personal loan.

What is Loan against Property (LAP)?

It’s a kind of loan which is given by the bank by keeping one of your personal property as collateral. The loan amount can be used for the same purposes as the above such as for paying off debts, construction, education, and marriage. It’s just that you have to mortgage a personal property with the bank off which you get 40%-70% as loan amount.

Choosing between the two

Time consumed

Loans against property are given against your personal property whereas personal loans are given after analyzing your income statement and the nature of your position to pay off your loan. Loans against property take a longer time to process ranging from 15 to 30 days because the valuation of your property takes time whereas on the other hand personal loans get processed within seven days because you don’t need any collateral as such which is required to give such kind of loans. The bank verifies your income statement and requested documents and based on that gives you credit scores and sanctions the loan.

Rate of Interest

Banks recover the loan amount sanctioned to you in the form of interest which is added to the main principle amount which has been as a loan. When it comes to interest rates, a secured loan will always have a low rate of interest as compared to an unsecured loan.

So, going by what is said above, Loan against Property has a lower rate of interest as compared to Personal Loans. The interest rate of Loan against Property starts at 11%, and it can go as high as 16%. When we talk about Personal Loans, it begins at 16% and can go to a surprisingly high rate as 24% to 25%, the reason being that it is unsecured.

Tenure of Loan

In the case of Loan against Property, the mandate of loan can be as high as 15 years whereas in case of personal loans it is as high as five years. The long tenure of Loan against Property and the lower rate of interest brings down the Equated Monthly Instalments (EMI) for the loan and makes it convenient for the borrower to pay it back quickly and enjoy the re-possession of his/her mortgaged asset. On the other hand, Personal Loans have high Equated Monthly Instalments(EMI) because of the high rate of interest and shorter tenure of the loan. Which one should you go for? Since we have discussed what each of these two loans has in store in them, let’s decide which investment is the best suitable for you. To get the hang of this, you should first scrutinize your needs properly to know which type of loan is the best suited for you.

Do you want to repay an immediate debt? Alternatively, You have to raise a loan for your daughter’s marriage.

Then, Personal Loan is the best option for you because of its minimal processing time. You get an immediate disbursement of funds which you can put into use immediately according to your requirement. These loans are short-amount loans taken in for the borrower’s emergency needs, and this is the reason why it is most suitable in these cases. Whereas when it comes to Loan against Property, these are high-amount loans which are usually sanctioned from the asset to meet high demands. You can also use it for an emergency situation, but it’s best kept for a high-profile requirement like establishing a business or paying off a huge debt.

Therefore, it boils down what purpose do you need it for considering all the factors you should go for the loan.

Defaulters

The nature of Personal Loan makes it risky for the bank to lend amounts to their customers. This is the reason behind which a high rate of interest is levied against such kind of loan so that it can be recovered fast. Defaulters under Personal Loan are subjected to a higher rate of interest and subsequently lose out on the credit score with the bank.

In the case of Loan against Property(LAP) the risk factor for the bank is low because they can keep the possession of the mortgaged asset in case the borrower fails to pay back the loan amount. A Loan against Property(LAP) is a better option considering the lower interest rate and long tenure, but it’s not suitable for you if you need funds at a concise notice, which can be provided in case of personal loans. Weigh the pros and cons of both the loans and after thoroughly analyzing your situation go for the one which is best suits your requirement.