Personal Loan Or Loan Against Property. Which One to Choose?

When we require money for different purposes at various stages in life, we often sell valuable assets or take loans to meet the need. Whatever the need may be, borrowing money by taking a loan is one of the easy ways to arrange for funds.

However, a personal loan and loan against property are two different types of loans. Understanding the differences between the two types of loans can help us take informed decisions when faced with the dilemma of choosing between the two. Let us look at the important differences between a personal loan and loan against property.

Personal Loan

A personal loan is an unsecured loan. You can apply for a personal loan at a bank or financial institution for your personal use. The bank will approve your application for a personal loan depending on your annual income and credit history.

• You can take a personal loan without a guarantor or any security/ collateral. Therefore, it is non-secure as in case of non-payment, the bank does not have a guarantor to assure payment.
• Interest rates are high for a personal loan, often in the range of 16%-21%. The main factor that determines the interest rate for a borrower is the credit score as the bank or lending institution is at higher risk in case of a personal loan.
• The tenure of a personal loan is lower than that of a loan against property. The maximum tenure is usually 5 years or 60 months.
• The loan amount available to you will depend on your monthly income, credit score or CIBIL score and your repayment ability. The maximum amount disbursed by the financial institution in case of personal loans is usually in the range of Rs.15 – 20 Lakhs only.
• Your EMI (Equal Monthly Installments) to be paid to the bank will be higher because of the higher rate of interest.
• Since there is no collateral, the processing time for a personal loan is faster. Your loan application can get approved within 7 days.

Loan Against Property

As is evident from the term, you can apply for a loan by offering your property as collateral to a bank or lending institution. This makes it a secured loan. Your ownership of the property, whether your own house or plot of land, will not be withdrawn. If you fail to repay, the bank will take possession of your property and your asset has to be forfeited.

• Interest rates for loan against property are usually lower than that of a personal loan. It can range from 12% – 17%.
• The loan tenure is also decided by your repayment ability based on your income. The tenure is much longer when compared to personal loans. Therefore, you get more time, anywhere between 1-15 years (180 days), to repay your loan.
• The loan amount is only a percentage of the total value of your property. Often, 40-60% of your property’s market value is given as a loan against property. This is usually much larger than what a personal loan can get you.
• The EMIs that need to be paid will be lesser in this case, as the rate of interest is also lower.
• The processing time can go up to 15-30 days. This is because, the bank will process your documents in order to verify your ownership details as well as assess the value of the property. The bank will also require your income statements to confirm your repayment ability. 
• Earlier, banks allowed loan against property only for real estate assets. Nowadays, loans are extended against gold jewellery, gold bonds and other financial assets such as Govt. securities and bonds.
• In the event that you are unable to pay the installments and you want to close the loan, you can always sell the property. Since the loan amount was only a percentage of the total market value, you have the option of repaying the amount by selling the property and having some additional amount for yourself too.

It is important to assess all the factors and analyze your purpose before deciding what suits your current needs. If none of them suit you, find out other options like a line of credit. Always go to a nationalised bank or financial lending institution of repute instead of greedy personal money lenders who charge hefty interest rates and fleece you.