Personal Loans are of two types – secured and unsecured. One of the most common secured Personal Loans is ‘Loan against Property,’ also known as LAP. Let us compare the Unsecured Personal Loan with a LAP.
Unsecured Personal Loan
- Easy to apply
- Simple eligibility criteria like a regular source of income and an excellent credit score in the range of 700 and above
- No collateral required
- Banks do not seek details of the end use of funds
- Repayment tenure up to 5years
- Amounts up to 50Lakhs
- Easy to apply
- Similar eligibility criteria, but banks are not so stringent with the requirement of credit scores in the range of 700 and above. You can get LAP with credit scores in the range of 650 and above as well.
- Collateral in the form of equitable mortgage of property in the name of the borrower
- No need to disclose end use of funds
- Use for a variety of purposes like catering to marriage expenses, medical emergencies, higher studies, and so on.
- Repayment tenure can extend to 20 years
- Amounts up to 40% to 90%of the value of property depending on satisfaction of income criteria and take-home pay norms
Which of the two products is better?
It depends on various factors:
- Requirement: If you are looking for a small amount (say under 10Lakhs), you need not provide collateral. You can avail an unsecured Personal Loan and save the collateral for the future. However, if your requirement is significant (more than Rs. 10Lakhs), it is better if you go for a LAP. You get higher eligibility when you opt for a LAP. Banks have products where they offer up to 90% of the value of the property subject to the satisfaction of other eligibility criteria like income and repayment capacity.
- The rate of Interest: The rate of interest on a LAP is less as compared to the rate of interest on an unsecured Personal Loan. A low rate of interest coupled with a more extended tenure results in a low EMI. It can increase your eligibility subject to the satisfaction of other criteria like the value of the property, and so on. Therefore, a LAP is a better option compared to an unsecured Personal Loan.
- Income Tax benefits: A LAP is a Personal Loan. However, you get income tax concessions if you can prove that you have taken the loan for purchase/construction/repairs and renovation of the residential If the purpose of your loan is repairing your home or arranging for margin to purchase new property, you can claim the benefits of the concessions in Income Tax as applicable to home loans. However, you should have the necessary documentary evidence to prove the nature of expenses. Under such circumstances, a LAP is a better option than a Personal Loan.
- Time factor: Banks approve and disburse Personal Loans within 72 hours. It is not the case when you apply for a LAP. Banks and NBFCs (Non-Banking Financial Companies) follow a different process when dealing with a LoanAgainst Property Application. There are more formalities like verifying the genuineness of the title of the property, evaluating the property, completion of equitable mortgage formalities, and so on. These formalities take time. If you are in urgent need of funds, then the Personal Loans are the best options. However, if you prefer to bide your time, you can opt for a LAP.
- Cost factor: A Personal Loan does not cost much to the borrower. Banks charge processing fees usually up to 2% of the loan amount. However, a LAP can see you spending more than what you do for a Personal Loan. You have to pay the processing fees. Also, some banks require you to pay for the legal scrutiny and evaluation process as well. You have to pay the stamp duty for the equitable mortgage. Registering the equitable mortgage with the SRO costs you money. Hence, from the cost angle, a personal loan is cheaper as compared to a LAP.
When is a LAP a better option?
A LAP is a better option to a Personal Loan in the following circumstances:
- Your requirement is high
- You wish to have a more extended period of repayment
- You have the collateral to offer
- You do not want to pay high interest on Personal Loans
- You look forward to claiming Income Tax concessions
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