Necessity of additional funds over and above one’s income and savings is a common phenomenon, especially with rising requirements in current scenario. Although there are various ways of sourcing these funds, one much sought after way is personal loan. The quick sanctions and even faster disbursals makes it a lucrative way of availing funds. But, this is not the only loan of this kind. Loan Against Property (LAP) is a kind of fund source carrying similar advantages but is not widely known about.
Loan against Property is a secured form of loan, borrowed from a financial institution against property that is owned or under home loan obligation. The property under consideration is evaluated to ascertain its prevailing market value and a percentage of this value is disbursed in form of loan, called loan to value (LTV). There are other factors too, like repayment capacity, reason for loan, etc. that are appraised before sanctioning the amount. The loan is repaid through equated monthly instalments (EMIs) for a stipulated tenure at the predetermined rate of interest. Customer can get LAP for a number of reasons like marriage of children, business loan, education and many similar.
Personal loan is a type of loan taken by individuals from a bank or a non-banking finance company (NBFC) to meet their personal needs. Income level, credit and employment history, repayment capacity etc. are the important criteria when availing personal loans. Since such loans are unsecured, the borrower does not need to put up any collateral such as gold or property to avail it.
However, it must be borne in mind that interest rates on personal loans are usually higher as compared to other loans as they are unsecured and the financial institution faces a greater risk while disbursing these loans. The tenure of personal loans are also usually lower than that of loan against property.
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Let us see the key features of both in detail:
Higher tenure in LAP versus personal loan: As LAP is a secured loan, banks offers a longer tenure, of up to 15 years, depending on the age, income and other eligibility criteria of the applicant for loan against property. Longer tenure in turn lowers the EMI, leaving the customer with higher disposable income. Personal loans, on the other hand, are offered generally for only up to 5 years.
Amount of Loan Sanctioned: As applicant avails LAP against property, financial institutions have the advantage of a security in the form of a physical asset. Hence, they are willing to shell a substantial amount as loan. However, this is subject to all due diligence and current value and mortgageabilty of the property. In personal loans, the maximum loan amount is considerably lower, usually in the range of ₹ 15-20 lacs, and majorly depends upon the income of the individual.
Interest Rates Offered: The rate of interest offered plays an important part in the decision making process of applicant.In LAP, the loan is offered at a comparatively lower interest rate vis-à-vis personal loan owing to the level of risk involved. As explained earlier, since LAP is a secured loan, the financial institution levies a lower rate on the disbursed amount. Also, financial institutions provide the option of floating rate in LAP, which means, as and when the interest rates go down, the benefit will also be passed to the customer.
Faster disbursement in Personal Loans: Personal loans have a faster turnaround time in disbursement than LAP as in the latter, due course of appraisal is followed along with property’s value evaluation. However financial institutions have enhanced their turnaround time considerably and are able to disburse LAP within 7 days on an average in current scenario.
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Prepayment Flexibility: Customers have the flexibility of making multiple part payments on the LAP availed without incurring any prepayment charges, but with certain terms and conditions. However, this convenience is many a times not available in case of personal loans.
Top Up Loan Facility: If the customer has already availed loan against property, but not upto the maximum limit, he or she can avail a top up on the existing loan, after all due dilligence and authorization by the financial institution.
While both LAP and Personal loans have their own set of advantages and disadvantages, the applicant can take a decision basis the convenience, interest rate on offer, processing time and amount required.
Author : Shaji Varghese
(The author is Executive Director and Business Head, PNB Housing Finance Limited)
