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How to Choose Between a Loan against Property and a Personal Loan?

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Financial emergencies come unannounced and to fulfil these, you may have to take a loan from a bank or an NBFC. Most of us look for loans that can be repaid over a period of time to tackle monetary needs. If that is something you are looking forward to then the best options are – personal loans or property loans. Both these loans are similar and distinct in many ways.

Below, we have explained the similarities and differences between a loan against property and a personal loan in detail so that you understand, which one is the most suitable for your needs.

What is a Loan against Property and Personal Loan?

A property loan is a secured loan. The lender lends money by holding your property as collateral until the loan amount is repaid entirely. It is an affordable loan and can be used for various purposes such as a wedding, education, business, medical emergency, home renovation, etc.

A personal loan on the other hand is an unsecured loan, where you do not have to pledge a security to get the funds. Like a loan against property, this loan is multi-purpose in nature and can be used for personal expenses.

Below-given are the differences between a property loan and a personal loan.

  • Loan Amount: Personal loan amount is usually determined based on your repaying ability and income. The loan amount is up to Rs. 25 lakhs. Some banks and NBFCs may provide and extension if your net monthly salary is suitable to meet the EMI requirements. In case of a property loan, you can get finance up to 75% of the property’s current market value. Thus the eligible amount can be up to 10 crores or more.

So, if you have a real estate property to pledge and looking for a loan amount of more than Rs. 5 lakhs then a property loan is the most suitable one for you. But if you want a lower loan amount, then a personal loan is the right choice.

  • Tenure: Since the quantum of the loan is higher for a property loan, the tenure is higher as well up to 15 years. Personal loan tenure is generally up to 5 years or less. Now, if you choose a longer tenure, the outgoing interest payout. So, if you have a good repayment capacity and can pay a loan sooner, then you should do so, and reduce the financial burden of EMIs.

  • Credit Score: Your credit history and credit score are the most important factors that financial institutions check to approve a personal loan. As this loan is collateral-free, financial institutions strictly analyze your credit history to understand how punctual you are with loan repayments and credit card bills. If the credit report shows timely payments, then the banks and NBFCs readily offer the loan, and vice-versa. A CIBIL score of 700+ is desirable to avail a personal loan.

For a secured loan, such as a property loan, credit score does matter, but a score of 650+ is also eligible for banks to provide funds. Better the score better will be your negotiation capacity for an ideal interest rate and tenure.

  • Interest Rate: A personal loan interest rate is higher (starts from 10.99% to 24% and higher) than that of a property loan (10.50% to 16%). This is because the former is unsecured in nature and the financial institution takes additional measures to secure their interests, as they will have nothing to auction to recover outstanding dues in case of default.

However, if you default on a loan against property, your property can be auctioned in case of a default. Analyzing the latter loan as low on risk, the bank or NBFC grants a lower rate of interest here. Nevertheless, you must try not to default on repayments as it will affect your credit score and ability to obtain new loans in the future.

  • Required Documents: To avail a personal loan, you need to submit basic KYC documents (identity and address proofs), PAN card, income tax return proofs, income receipts (last 6 months salary or income statements), bank statement of the account where the salary gets credited, and a recent passport-sized photographs.

To avail a loan against property, you have to produce KYC documents, income tax return proofs, income proofs, and a recent passport-sized photographs. But apart from these, you have to provide the following property documents:

  • Copy of property agreement
  • Latest house tax return proofs
  • Registered sale deed/past sale deed chains
  • Latest maintenance and electricity bills
  • Conveyance deed
  • Approved building plan from the Municipal Corporation
  • Lease deed (if the property is leased)
  • Share certificate (if the society is formed) 
  • Loan Processing and Disbursal: In case of a personal loan, the processing is quick. As only your credit score, net monthly income, and repayment ability will be considered as major criteria for loan approval, the processing time is lower as compared to that of a loan against property. The funds can be disbursed in as less than 48 hours if all the documentation is in place.

To approve and disburse a property loan, the financial institution has to carefully study the property documents, condition of the property, legal issues if any. Thus, it takes a longer time to process this loan against the former. The legal and internal checks to evaluate the property value can take a week or more. So, a property loan may take around 2 weeks or more to get approved, after which the funds will be disbursed to the borrower.

Should You Opt for a Personal Loan or a Property Loan?

The ideal option you must go with primarily depends on two factors: quantum of loan and how urgently you want the funds. If you want the funds immediately, then a personal loan is the best option, as it gets disbursed within 3 days of making the loan application. If you require a higher loan amount and are prepared to wait for a few weeks until the funds arrive, then a loan against property is a suitable choice.

To get the best deal from financial institutions for low interest rates, good terms, tenure, and loan amount as per requirements, you should maintain a great credit history and have excellent repayment ability, be it any loan. Also, do not forget to compare offers online across top providers of both these loans, so that you can select the perfect loan scheme as per your requirements.

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