Should you opt for personal loan or loan against property?

Wondering which loan to choose? Confused by the large number of loan options in the market? Before choosing between personal loans or loan against property, evaluate your financial situation. Personal loans are a type of unsecured loan that can be used for any purpose. You can secure your mortgage as collateral and take a loan against your property from a lender. Personal loans are sanctioned based on your credit scores and ability to repay the loan, while your mortgage acts as a security measure when availing of loans against your properties. Each has its pros and cons.

Pros of availing of a loan against property

Here are some of the benefits of availing a loan against a property.

• Lower interest rates: Since you have collateral backing up your loan amount, you can negotiate lower interest rates from your lender. Lending institutions are also more likely to offer you lower interest rates because your mortgage acts as a security blanket. If you are unable to repay the loan amount, lenders can recover their losses.
• Higher loan amount: You can also typically ask for a higher loan amount because the lender has your property as a security measure. However, lenders will also consider your credit score and income before sanctioning the loan amount.
• Eligible for tax deductions:  If you choose loans against properties and use them to buy a new house, you can get INR 2 lakhs deducted from your interest payments under section 24 (B) of the Income Tax Act. If you use the amount to streamline your business operation costs, you can get those expenses deducted under section 37 (1) of the Income Tax Act.  However, if you use the amount to renovate your existing property, you cannot enjoy tax deduction benefits.
• Longer repayment tenure: Compared to unsecured loans like personal loans, if you apply for a loan against your property, you can avail of longer repayment tenure and flexible loan terms. This can make your monthly EMIs more manageable.
• Can be used for a variety of purposes: You can use your loan against your property for a variety of purposes like consolidating debts, renovating your kitchen, starting a business, financing your dream vacation, and so on.

Cons of availing of a loan against property

There are certain disadvantages of availing of a loan against a property like,

• Risk of foreclosure: Although your mortgage acts as a security measure, if you are unable to repay the monthly EMIs, your home will be at risk. If you default on your loan, lenders will seize your property to recover their losses.
• Processing costs: When planning to take a loan against a property, make sure to evaluate the registration costs, processing charges, and additional costs, which will increase the overall cost of the loan. Head to Andromeda and use their loan EMI calculator online to evaluate if you can pay off the loan installments comfortably.
• May impact credit score: While a loan against property sanctions a comparatively higher loan amount, make sure that you do not have other financial obligations and adequate income to pay it off. If you default on your EMI payments, it will negatively impact your credit score.
• Comparatively longer processing time: Since lenders have to verify property documents, previous owners, and tax documents when processing your loan against a property, it takes a long time. However, some lenders like Andromeda offer quick loan disbursals with minimal paperwork.

Overall, you can avail of a loan against a property if you want access to a large sum of funds. However, consider the risks and disadvantages before proceeding with your loan application.

Pros of availing of a personal loan

Availing of a personal loan has its pros and cons. Here are some of the advantages of taking personal loans.

• Quick access to funds: Personal loans can be processed quickly, so if you need some funds urgently, you can take out personal loans. If you have a steady income and a good CIBIL score, lenders will sanction your personal loan amount pretty quickly.
• No collateral needed: In personal loans, you do not need to keep your mortgage or car as collateral to secure the loan amount. Personal loans are unsecured loans, which means your credit score and income are of utmost importance when availing of the loan amount.
• Tax deduction benefits: While personal loans do not offer tax benefits directly, you can enjoy tax deductions depending on how you plan to use the loan amount. If you use the personal loan amount to buy a new residential property, you can claim deductions of up to INR 2 lakh rupees under section 24 of the Income Tax Act. If you use your personal loan amount to purchase an asset like jewelry or non-residential property shares, you can claim tax deductions when you sell that particular asset.
• Can be used for a variety of purposes: You can use personal loans for a wide variety of purposes like in medical emergencies, for renovating a property, going on a long vacation, or financing a wedding.

Cons of availing of a personal loan

It is not all rosy, personal loans also have certain disadvantages like the following,

• Comparatively higher interest rates: Since personal loans are unsecured loans, lenders may charge higher interest rates. You can try to negotiate better terms if you have impeccable CIBIL scores and a steady income.
• Credit score requirements: If you do not have good CIBIL scores, lenders will not sanction your loan amount. Without good credit scores, lenders have no way of knowing if you are a reliable borrower. If you have poor credit scores but need access to quick funds, try applying for a joint loan with a co-applicant with better credit scores.
• Shorter repayment tenure: Compared to secured loans, personal loans have a shorter repayment tenure. You may have to pay higher monthly installments if you avail of personal loans.

Which one is better- a loan against property vs a personal loan?

Whether you should take a loan against your property or a personal loan depends on your financial situation and how much funds you need. If you need a large sum of money and want to secure lower interest rates, loans against properties are the better option. However, if you need some funds and do not want to pledge your property to the risk of foreclosure, you can choose personal loans. Remember that personal loans have a slightly higher interest rate than loans against your properties. Compare interest rates and repayment tenures of different lenders to choose the best loan suited to your needs.