It is perfectly normal to find yourselves cash-strapped at certain times. Be it business expansion, meeting wedding expenses, or financing higher education, a quick and readily available source of cash is all we look for.
Therefore, in times like these, you may often find yourself exploring options like a personal loan or loan against property. These are two of the most sought-after avenues if you’re aiming for a small loan. However, it is relatively possible that in the haste of obtaining quick finance, you might end up overlooking some critical differences between the two.
On that note, let’s differentiate between Loan Against Property (LAP) and Personal Loan (PL) and know what’s best for you.
What are LAP and PL?
In Loan Against Property (LAP), the lender tends to forward you a secured loan and, in turn, keeps your property as security, but only until the entire amount (with interest) has been repaid. LAP is usually considered the second most affordable loan after home loans and can be used for personal/professional financial uses.
On the other hand, a Personal Loan (PL) is considered an unsecured loan. This is because the person borrowing the money doesn’t need to pledge any asset as security to obtain the loan. Therefore, it can be easily availed from any financial institution for personal use.
- Interest Rates: Whenever you take a loan, interest rates are one of the more essential factors to consider. Since Loan Against Property (LAP) are secured loans, the interest rates are generally lower, ranging from 11% to 16% per annum. This is mainly because the lender has a lower risk in case the borrower defaults. On the other hand, Personal Loans (PL) exhibit relatively higher rates, going up to 25% per annum in some cases. Moreover, this number may vary depending on your income, credit score and location, when you apply for a PL.
- Loan Quantums: Loan Against Property (LAP) offers the window to obtain a loan ranging from 40% to 70% of the property used as collateral. Generally, the loan amount can foray into crores depending upon the size and value of the property. For Personal Loans (PL), the loan amount is highly subjective, depending on your monthly income, repaying ability, outstanding debt, credit score, and so on. The amount will be relatively lesser than that in LAP since PL is an unsecured loan.
- Loan Tenure: While LPA offers higher loan amounts, it also provides longer loan tenures. You can take as long as 15 years to repay the amount, but that usually means you’ll be draining more in interest amounts. For personal loans, the stipulated repayment period allowed to clear a personal loan is only 5 years since the amount is relatively lower.
- Negative Consequences: If you default on the loan repayments taken against your property, you are liable to lose your collateral forever. Therefore, be mindful of such dire consequences while taking an LAP. On the other hand, defaulting on Personal loans will lead to increased interest rates and deteriorate your credit score as well.
Which one is Best for You?
If you’re looking for a large lump sum of money and are comfortable in paying it off over an extended period with low-interest rates, Loan against property (LAP) is the avenue built for you. It can be used to handle requirements that require huge chunks of cash concentrated in a short window of time.
However, if you’re sniffing for cash to meet an urgent requirement that doesn’t require a large amount of money, jump on a personal loan app and obtain the right personal loan package for you; they are disbursed quickly and offer amounts big enough to meet any personal/professional emergency.
It is essential to make sure that the loan amount, loan tenure, interest rates, processing time, and repayment mechanisms are suitable for your need and financial condition. While both LAP and PL are viable options, the choice is highly subjective, based on your needs.