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Which is Better : Personal Loan or Loan Against Property?

At some point in time, you may find yourself in a situation where you are in dire need of cash, whether it is to fund higher education or an emergency medical expenditure. To meet such financial requirements, you assess all the options at your disposal. The world of loans and financial instruments is riddled with jargon. It is easy to get perplexed amid the plethora of options available. It is highly likely though, that two options you will end up considering will be a loan against property and a personal loan.

Let’s look at the two alternatives across parameters and examine which one is better suited to your needs and situation.

First things first, let’s look at the scope of both the options. A personal loan is an unsecured loan that you can avail from any financial institution or lender for personal use. When you obtain a loan against property (LAP), you are using a piece of real estate you own, as collateral.

So essentially, the choice you are making is about

Whether or not you want to involve an element of collateral security, and that is why it becomes crucial to look at other parameters.

Here are some of the key differences between personal loans and loan against property, to help you understand better.

#1 Interest Rates Offered:

The rate of interest is the first piece of information you look at when availing any loan.

A loan against property (LAP) is a secured loan and as a result, the interest rates levied on the disbursed amount here are lower than those that come with personal loans. For a LAP, the interest rate can be anywhere between 13%-24% per annum Financial institutions also provide the option of floating rate in LAP, so if the interest rates go down, you will be benefitted too!

On the other hand, for personal loans, being unsecured, the interest rates are generally high, ranging between 11%-40% per annum Thus, if we were to look at the interest rate alone, LAP is the preferable option.

#2 Equated Monthly Installments (EMIs)

This follows from the first point. The logic is simple: if the rate of interest is high, then the EMI to be paid will also be high. As a result, personal loan EMIs are much higher than those under loan against property.

#3 Loan Tenure

If you choose to take a loan against property, then you can repay your loan over a period of 5-15 years depending on the age, income, and other eligibility criteria. Which is reasonable and feasible, since lower EMIs mean higher disposable income for yourself. In the case of personal loans, the usual time period is between 12 and 60 months

#4 Quantum of Loan sanctioned

Since LAP is secured against a physical asset, the loan amount will be 40%-70% of the property that is being used as collateral. And even though this is subject to due diligence, the amount is mostly higher than what personal loans allow. The maximum amount disbursed under personal loans is considerably lower, usually not exceeding INR 25 lacs [2], and majorly depends on your income.

#5 Time to Process the Loan

A personal loan has far less documentation and procedures involved, so it almost works on instant approval. All the bankers need to do is evaluate your monthly income and your credit score. You might have the funds with you in less than a week. However, if you are taking a loan against your property, the approval time is longer due to the due diligence procedures needed across the property-related documents and other formalities and legalities. A fortnight is the least stretch of time you should account for.

While both LAP and Personal loans have their own set of advantages and disadvantages, the applicant can take a decision basis the convenience, interest rate on offer, processing time and the amount required.

The best option depends on your emergency and the quantum of finance you would require. Medical emergencies can hardly wait, in which case you would go for a personal loan. This wouldn't be the case if you can afford to wait for a pre-planned medical expense to avail LAP at a low-interest rate and a longer tenure. Assess your needs on a case-by-case basis.

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