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February 29, 2024
personal loan

Raj and Priya understood the significance of loans. Loans offer the bridge to turn aspirations into reality. LAP, secured by property, provides substantial funds for bigger endeavours, while personal loans provide flexibility for immediate needs without collateral. The duo was ready to dive deep into the verticals of loans to decide which path would suit them best. As Raj and Priya delved into their research, they discovered an array of differences between LAP and personal loans, each designed to serve different financial needs.

Differences between LAP and personal loans –

Loan amount

LAP offers higher loan amounts due to the property’s value, while Personal Loans offer a limited amount based on income and creditworthiness. Due to the collateral involved, a loan against property generally allows borrowers to access higher loan amounts compared to personal loans. The value of the property determines the loan limit. In contrast, personal loans have loan limits based on the borrower’s income, credit score, and repayment capacity, which might be lower than what LAP offers.

Collateral

LAP requires collateral (property), providing a lower interest rate.  Personal loans by nature are unsecured resulting in a higher rate of interest. As LAP is backed by security i.e., the property, the rates charged are lower than personal loans. This collateral offered in the case of LAP lowers the risk faced by lenders, which allows them to charge a lower rate. As personal loans do not need any security, lenders tend to consider them riskier, making them charge a higher rate of interest.

Interest rates

LAP boasts lower interest rates due to the secured nature, whereas Personal loans have comparatively higher rates. The secured nature of loans against property allows lenders to offer lower interest rates since they have an asset as security. On the other hand, personal loans are unsecured and carry higher interest rates to compensate for the risk lenders take on without collateral.

Eligibility

LAP eligibility considers property value and income. Personal loan eligibility centres around income and credit score. For a loan against property, eligibility factors include the value of the property being mortgaged and the borrower’s income. Personal loan eligibility primarily revolves around the borrower’s income and credit score, with no property involvement.

Tenure

Canara Bank Loan Against Property or LAP of any other bank offers longer repayment tenure, reducing the EMI burden. Personal loans come with shorter tenures. Loan against property provides the flexibility of longer repayment tenures, which leads to lower equated monthly instalments (EMIs) and reduces the financial burden on borrowers. Personal loans usually come with shorter tenures, leading to higher EMIs.

Processing time

LAP approvals take more time due to property evaluation. Personal Loans are processed faster. Loan against property involves property evaluation and legal checks, leading to a longer approval process. Personal loans, being unsecured and involving fewer factors, are processed faster.

Usage

LAP funds specific purposes like business expansion. Personal loans can be used at the borrower’s discretion. Loan against property is often earmarked for specific purposes like business expansion, education, or medical expenses. Personal loans provide more freedom as borrowers can use the funds for various personal needs without restrictions.

Credit score

LAP approval is somewhat lenient towards credit score due to collateral. Personal Loans demand a good credit score. While LAP approval does consider credit score, having collateral can sometimes make lenders more lenient towards lower credit scores. Personal loans usually demand a good credit score due to the absence of collateral.

Tax benefits

IDFC Loan Against Property or any other LAP product offers tax deductions on interest paid. Personal Loans lack this benefit. Interest paid on a loan against property is eligible for tax deductions under certain sections of the Income Tax Act. Personal loans, however, do not offer this tax benefit.

Documentation

LAP requires extensive property-related documents. Personal loans involve less complex documentation. Loan against property requires extensive documentation related to the property’s ownership, valuation, and legal aspects. Personal loans involve simpler documentation primarily focused on the borrower’s income and identity.

Risk to property

In case of LAP default, the property is at risk. Personal loans don’t involve collateral, thus safer for assets. Defaulting on a loan against property puts the property at risk of being seized by the lender. In contrast, personal loans don’t involve collateral, so there’s no direct risk to assets in case of default.

Prepayment charges

LAP might have prepayment penalties. Personal loans offer more flexible prepayment options. Loans against property might have prepayment penalties or charges due to the long-term nature of loans. Personal loans generally offer more flexibility in terms of prepayment without heavy penalties.

Loan against

LAP is specifically against property. Personal Loans do not require such specificity. Loan against property is granted against the mortgage of a property. Personal loans do not require such specific asset-based collateral.

Loan transfer

LAP transfer to another bank might involve higher costs. Personal loans are easier to transfer. Transferring a loan against property to another bank might involve higher costs due to property valuation and legal processes. Personal loans are generally easier to transfer.

Loan disbursal

LAP funds are disbursed as a lump sum. Personal loans might provide staggered disbursal. A loan against a property usually provides the entire loan amount as a lump sum. Personal loans might offer staggered disbursal, particularly for larger amounts.

Interest calculation

LAP interest is usually calculated on a reducing balance. Personal loans can follow various interest calculation methods. The interest on a loan against property is typically calculated on a reducing balance method. Personal loans can have varying interest calculation methods depending on the lender’s policies.

As they went through these differences, Raj realised that his aspiration of expanding his small business might be better suited for a Canara Bank loan against property, given its lower interest rates and higher loan amount that could give his business the wings it needed to soar.

On the other hand, Priya’s dream of a destination wedding could be funded by an IDFC personal loan. With quicker processing times and no collateral required, she could celebrate her special day without the worry of property stakes.

As the stars appeared over the skyline, Raj and Priya made their decisions. They understood that LAP and personal loans were like different sides of the same coin, catering to distinct financial needs. 

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