Personal loan vs. Loan Against Property!

By BankBazaar | January 12, 2013

Loans against property are yet another variant of the basic personal loan which has its own pros and cons. While comparing the basic personal loan against the loan against property one has to take into consideration the fact that each type is suitable under a certain state of conditions which only the borrower can justify at the time of making the decision. There is no universally true comparison among these two types of credit that can hold good for every situation.

What is Loan Against property (LAP)?

This is a special type of credit which is provided to the borrower with some kind of property as the security against the amount given. The property is mortgaged and a fixed percentage of the prevailing market value of the property is given to the borrower as a loan. This percentage normally ranges between 60-70% of the value of the property. In most banks, there is a facility of overdraft in this kind of arrangement.

Advantages of the LAP over Personal Loan

There primary benefits that one gets from a LAP are as follows:

  • The amount of loan available is much higher in case of a LAP as compared to a personal loan.
  • The repayment period of LAP is up to 15 years which is much higher than the personal loan thus making the EMIs more affordable.
  • The rate of interest in LAP is around 12-15% which is much lesser than a personal loan.
  • This is a good way to employ a property which is lying idle to raise some capital in times of requirement rather than resorting to high-interest personal loans.
  • There is no prepayment penalty on the LAP which is applicable in case of the personal loans. Thus a LAP can be liquidated whenever there are extra funds available without any additional cost.
  • The LAP can be easily refinanced through other banks and financing agencies.
  • Capital is raised at a cheaper interest while still retaining the ownership of the property.

Advantages of Personal Loan over LAP

While the above-discussed benefits may make the LAP appear as the clear choice against a personal loan there are some issues which work in favor of the personal loan too.

  • The loan amount that one gets through the LAP is restricted to a maximum of 70% of the market value of the property.
  • By opting for a LAP the borrower is mortgaging a huge asset for a small amount of loan.
  • In case of a default situation arising due to unforeseen circumstances, the property in the LAP may be confiscated by the bank which is not the case in a personal loan.
  • The property is stuck in the LAP for a long period and the borrower cannot use the value of the property to obtain any other credits which might be available in the market subsequently.
  • Personal loans can be availed for small amount starting from Rs. 50000 which is not practical in case of LAP.

Making the choice between a personal loan and a loan against property depends on the amount required and the urgency of the situation which can only be decided by the borrower at that point of time. However, it is useful to know and understand the shortcomings and plus points of both types of credit in order to make an informed decision.

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