Loans are of two different types: secured loans and unsecured loans. Secured loans are loans secured by a collateral or an asset. Gold loan, home loans and loans against property are all examples of secured loans. In the case of secured loans, the lender can sell the pledged asset for loan recovery. Thus, lenders see secured loans as a low-risk offering. Unsecured loans are not backed by any asset or collateral. In the case of these loans, lenders evaluate the risk for them by analysing the borrower's income and credit profile, CIBIL score, etc. If the borrower defaults on the loan, lenders do not have an asset they can sell for loan recovery and therefore, lenders see unsecured loans as high-risk loans. Car loan and personal loans are both examples of unsecured loans.

Loans against property are a type of secured loan. In the case of these loans, a borrower borrows money against a residential or commercial property or owned land. In other words, in the case of loans against property, a commercial or residential property or owned land serves as collateral. The loan against property rate is decided based on the borrower's CIBIL score, age and income profile as well as the quality of the collateral.

A personal loan, on the other hand, is a type of unsecured loan. Lenders sanction these loans and decide the rate of interest to be offered on them based primarily on the age and income profile of the borrower. Both loans against property and personal loans come with zero end-use restrictions. In other words, there is no restrictions regarding how a borrower can use the loan money and therefore, many borrowers get confused about which is a better loan option for them. This article focuses on answering this very question.

Loan Against Property vs Property Loan: Which is Better?

Interest Rates

Since secured loans are backed by collateral, the risk involved for the lender in the case of these loans is much lower. If the borrower ever defaults on loan repayment, the lender can sell the pledged asset for loan recovery. This is not the case with unsecured loans where loan defaults inevitably translate into monetary losses for the lender. Thus, to make up for the extra risk involved in the case of unsecured loans, lenders charge a much higher rate of interest.

When it comes to interest rates, loans against property always turn out to be far cheaper than personal loans. Currently, the interest rate on loans against property varies between 8% and 10% and the interest rate on personal loans varies between 10.5% and 24% per annum.

Loan Amount or Loan Value

In the case of loans against property, the loan amount is decided in terms of the LTV ratio. The LTV ratio refers to the percentage of the total value of a property that can be sanctioned as a loan. In the case of loans against property, the LTV ratio varies between 50% to 60% of the pledged property's total value. For instance, if your property is worth 1 Crore, with a strong income profile and a good credit score, you will be able to avail of loan up to 60 Lakh against it. Most people who opt for loans against property do so because of the sizeable loan sanctions that one can avail of under these loans.

In the case of personal loans however most lenders cap the maximum limit at 25 Lakh or so. Personal loans are high-risk loans and therefore, lenders do not generally sanction a very high loan amount.

Loan Tenor

Yet another reason why home loan borrowers prefer loans against property over personal loans is that loans against property or property loans come with a long repayment period. Since these loans generally involve a sizeable loan sanction, lenders give borrowers up to 20 years to repay the loan. The long repayment period involved eases the burden of loan repayment and helps borrowers keep their EMIs within the affordable range. This is not the case with personal loans where the repayment period cannot usually extend beyond 7 years.

Processing Time

This is one area where a personal loan gains an upper hand. Property loans involve a lot of paperwork -- the lender must verify the papers of the property being pledged as collateral and ensure all the information provided by the borrower is correct. The legal and technical verification of the collateral can easily take up to two weeks. Thus, in the case of loans against property, borrowers must usually have to wait a few weeks before they see the loan money in their account. This is not the case with personal loans. If you apply for a personal loan with a lender with whom you have had an account for years, you may be able to get a personal approved and disbursed within two to three days. Thus, if you need money urgently, a loan against property may not be the right choice for you.

Credit Score and Other Eligibility Requirements

Loans against property are secured by an asset or a collateral. Thus, the risk involved for the lender in the case of these loans is not very high. Therefore, lenders are not very strict about borrowers meeting all the qualifying criteria. This does not mean that you will get approved for a loan even if your credit score is 600. It means that your lender may show some leniency if their credit score qualifying criteria is 750 and you have a credit score of 725.

In the case of personal loans, however, lenders are very strict about borrowers meeting all the qualifying criteria. They do not show any leniency in the case of these loans.

Final Words

Loans against property most certainly have many advantages over personal loans and are a better choice if you are a smart and responsible borrower. However, if you need money urgently and cannot wait for a week or so for your loan to get approved and disbursed, it's best to opt for a personal loan.

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