Which is ideal between a personal loan and a loan against property? | Comparison between Personal Loan And Loan Against Property (PL Vs LAP)

Mortgage Loan

For both personal loans and loans secured by property, lenders do not impose any end usage restrictions. Borrowers can employ the financing proceeds for any personal reason, except speculation, including home improvements, growth of the company, child’s school or marriage costs, international travel, or other personal expenses.

The majority of people struggle to decide between the two loan types because they both serve the same purpose. Each of us will experience an occasion or circumstance where we may want money. For funding to fulfill an urgent need, the majority of us prefer banks and NBFCs. Even though personal financing and loans secured by property are two common credit products, one has to carefully decide which one is favorable to them.

What Exactly Is A Loan Against Property?

This is a loan that is “secured,” as the name suggests, meaning that the financier offers you the money while keeping the asset as proof until the entire loan is returned. After mortgage loans, it is the second-cheapest loan. Anyone is free to use the money anyway you see fit, including for a wedding, home renovations, business expansion, and unexpected medical expenses.

Define a Personal Loan

An unsecured loan, such as a personal loan, does not require the borrower to provide any form of collateral. The money may be utilized for a number of items, such as a wedding, a child’s education, a trip, or a critical medical expense.

What Distinguishes A “Loan Against Property” (LAP) From A “Personal Loan”?

1. Loan sum

For personal loans, the borrower’s monthly income and capacity to repay the loan play a major role in determining the loan amount. While certain lenders authorizing financing amounts as high as Rs 45 laths, the majority of lenders who offer personal loans only issue loans up to a maximum of Rs 15 laths. 

  • When it comes to LAP, the market price of the real estate in question and the applicant’s income are typically used to determine the loan amount.
  • In most cases, lenders approve an LAP loan amount equal to as much as sixty percent of the property’s its market value. Therefore, for individuals seeking larger loan amounts, LAP is a preferable choice.

2. Processing Duration

Personal loans have among of the fastest disbursement times of all loan types.  After submitting a loan application, they are typically disbursed within two to seven days. To choose individuals with solid credit profiles, many lenders provide pre-approved personal loans.

  • After submitting a loan application, these loans are typically disbursed shortly after. A speedy disbursement for loan applicants is made possible by some lenders’ full-service digital processes for processing personal loan applications and evaluations.
  • LAP manufacturing, on the contrary hand, may require between one and three weeks because lenders must review the applicant’s property-related paperwork before releasing the loan.
  • In order to confirm ownership and market value, lenders also carry out a technical analysis. All of these steps take time, so takes down the LAP applicant’s loan acceptance process.

3. Fees for Upfront Payments

On the initial repayment of a private loan or LAP obtained at an fixed rate of interest, lenders are permitted to charge prepayment costs. On loans obtained at floating rates, the RBI has forbidden lenders from charging prepayment penalties. 

  • For personal loans, the typical prepayment/foreclosure cost is up to 5% of the outstanding principal. Only until a specified portion of the loan term has passed do certain lenders permit prepayment.
  • Prepayment penalties for LAPs without fixed rates typically reach one percent of the balance owing. When you intend to pay off the money early, choose mortgages or LAPs with adjustable rate of interest.
  • Choose a lender with a low prepayment charge if you want to choose a personal loan with a fixed interest rate.

4. Credit Rating

A personal loan can be obtained with a good credit score because it is a loan that is unprotected with an interest rate that is higher than a loan secured by assets. It’s possible that a loan against asset could result in a lower credit score then an individual loan because the lender will benefit by your property as collateral and the interest rates could be lower. 

  • A lengthier loan against property tenure may raise your credit score than a shorter loan against personal property. But in both situations, timely repayment is essential to building a strong credit history.

Which is better Choice for You?

Depending on the urgent situation and the quantity of money you’d need, the ideal course of action may vary. A personal loan might be an excellent choice if you need money for a last-minute need such medical treatment, as its disbursed three days before application.

Bottom Line

If you call for a large borrowing amount, a Loan upon Land is always the more suitable alternative. Lenders are reluctant to approve a large personal loan because they are unsecured loans. What’s more, the amount of personal financing that you qualify for can entirely be based on your individual income and ability of repaying it.

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