Lenders do not put any end usage restriction on both personal loan and loan against property. Except for speculative purposes, borrowers are free to use the loan proceeds to finance their home renovation, business expansion, child’s education/marriage expenses, international trip or any other personal purposes. However, because both forms of loans serve the same objective, most individuals get confused in choosing between the two options.
Below is a brief comparison between a personal loan and LAP to assist you in making an informed decision.
1. Processing time
Among all loan types, personal loans have one of the quickest disbursements. They are usually disbursed within 2 to 7 days of making loan application. Many lenders offer pre-approved personal loan to select customers having good credit profile. Such loans are usually disbursed within a few minutes of making the loan application. Some lenders also offer end to end digital process for personal loan application and evaluation process, resulting in quick disbursal for the loan applicants.
On the other hand, LAP processing can take 1 to 3 weeks as lenders have to examine the applicant’s property-related documents before disbursing the loan. Lenders also conduct a technical study to verify the property’s ownership and market value. All of these processes require time, which slows down the loan approval process for an applicant of LAP.
2. Interest rate
The secured nature of LAPs reduces the credit risk for the lender as they have the option to sell the property in case of a default by the borrower. This leads the lenders to offer LAP at lower interest rates than personal loans. The LAP interest rates usually ranges between 7% p.a. and 14% p.a. Personal loans, on the other hand, usually have interest rates ranging between 10.25% p.a. to 26% p.a. Personal loan applicants with credit scores below 750 or those who score poorly on other eligibility parameters have lower chances of loan approval, or if approved, are charged higher interest rates.
As lenders have an option to sell the underlying collateral if an LAP is defaulted on, they tend to be more lenient with credit scores and other metrics when reviewing LAP applications. As a result, those who have been rejected a personal loan or are being charged higher interest rate due to their low credit score can consider availing LAP.
3. Loan tenure
The loan duration in the case of an LAP usually goes up to 15 years, with some lenders offering loan tenures of up to 20 years. In case of personal loans, the loan tenure is usually around 5 years, with some lenders offering repayment tenures of up to 7 years. As a longer tenure reduces EMI payments, it increases the borrower’s ability to afford big ticket loans. Hence, applicants who have been denied personal loans due to the lack of repayment capacity can opt for LAP with longer tenures. However, keep in mind that a longer term will result in a higher interest cost.
4. Loan amount
In case of personal loans, the loan amount is mostly determined by the borrower’s monthly income and their ability to repay the loan. Most personal loan lenders disburse personal loans of up to Rs 20 lakhs, with a few lenders sanctioning loan amounts of up to Rs 40 lakhs.
In case of LAP, the loan amount is usually determined by the market value of the underlying property as well as the income of the applicant. Generally, lenders sanction up to 60% of the property’s market value as LAP loan amount. Hence, LAP is a better option to opt for those looking for bigger loan amounts.
5. Prepayment charges
Lenders are allowed to levy prepayment fees on the prepayment of personal loan or LAP availed at a fixed interest rates. However, the RBI has barred the lenders from levying prepayment fees on loans availed at floating rates.
Prepayment/foreclosure fees for personal loans usually range anywhere up to 5% of the principal outstanding. Some lenders allow prepayment only after the completion of a certain period of the loan tenure. In case of fixed-rate LAPs, the prepayment penalty usually goes up to 1.5% of the outstanding loan amount. Thus, if you plan to pay off your loan early, opt for personal loans or LAPs offered at floating interest rates. If you wish to opt for a personal loan at a fixed interest rate, then prefer a lender charging a minimal prepayment/foreclosure penalty.
Though an LAP is a better option as compared to a personal loan in terms of interest rate, loan amount and loan tenure, LAP falls short in terms of disbursal time. As a result, for people who require funds quickly, availing a personal loan would be a better option. Also keep in mind that if you default on your LAP, your lender can take control of your underlying property. As a result, before choosing the LAP tenure, make sure to thoroughly assess your repayment capacity.