Every business requires an influx of funds from time to time. Loans are the best way to address all business goals, without putting a burden on current operations. But there are several kinds of loans available to a business, the most popular being personal loan loan against property. Both have their own set of pros and cons, which you should always keep in mind while considering one.
First, we shall elaborate on what exactly defines a Personal Loan and a Loan Against Property.
A personal loan is an unsecured loan where the borrower does not have to pledge any collateral to obtain the loan.
Loan Against Property
On the other hand, a loan against property is a secured loan disbursed by a lender against the borrower’s residential or commercial property.
Now that we have clearly defined the differences between a personal loan and a LAP, let us explore the advantages vs disadvantages of both.
The urgency of receiving the loan amount plays a large role in deciding between the two. A personal loan (PL) is processed faster than a LAP, as the credit assessment process only analyses the borrower’s credit score and monthly income. Whereas, a LAP takes longer as the evaluation process includes an in-depth analysis of the market value and legalities of the property mortgaged.
Thus, a PL is suitable for those looking for a quick loan, as the approval and disbursement speed is faster.
As a PL is an unsecured loan, it is a high risk for the lender, as it is not provided against any immovable asset which is the case for LAP. Due to this, generally, the LAP rate of interest is lower than that of a PL. Additionally, loan against property interest rates are flexible and one can choose between a fixed or floating rate of interest.
Loan Amount and Tenure
As previously mentioned, PL is preferred by those looking for a quick loan. But the downside is that PL offers a short tenure and can only be taken for a maximum amount of 15-20 lakhs. Whereas, LAP is the best choice for those looking for a substantial amount of money and a long tenure.
The processing fee for a personal loan is always higher than that of a LAP.
A PL is offered on the basis of the borrower’s income, hence no security is required for approval and can be approved within a few days.
LAP, on the other hand, is valued up to 40-70% of the property value and the disbursal amount can be in crores, which is a better option if a higher amount is required without urgency. The processing time is relatively long, as the lender assesses all property documents and owner’s information. This can take even more time in the case of multiple owners, as all of them will have to submit a no-objection certificate for loan approval.
Repayment & Credit Score
Being an unsecured loan with a higher interest rate, timely payment of PL dues will have a positive impact on your credit score. LAP has a low-risk factor, as it is approved against the security of the borrower’s assets and the interest rate is lesser. And if a shorter tenure is chosen for a LAP, it is cheaper than a PL, in terms of rate of interest. Additionally, even paying the dues of a LAP can improve your credit score, making access to future loan requirements easier.
Application & Sanction
The eligibility criteria for LAP and PL are different, even though the basic documents required might be the same. As previously mentioned, a lender looks at the borrower’s CIBIL Score and monthly income for evaluation of a PL. Whereas, for a LAP, the eligibility is determined on the basis of repayment capacity and property value.
To conclude, LAP is more beneficial than a Personal Loan, in a multitude of ways. It provides higher loan amounts, longer repayment tenure, greater flexibility and lower interest rates. This makes it well suited for business owners and self-employed professionals.
And you can choose from a wide range of banks and NBFCs to obtain a LAP. Popular ones include Electronica Finance Limited, ICICI Bank, Tata Capital, HDFC Bank, Bajaj Finserv etc. These organisations provide MSME Loans as well.
In a nutshell, make sure your loan requirements are clear before opting for a PL or LAP, as both have their own set of benefits and drawbacks.
Loan against property