First things first, let’s get the confusion out of our way right away. Most of us are aware of the ongoing debate between a home loan and a loan against property debate. Many of us use the terms “loan against property” and “home loan” interchangeably, although they are different.
What is a home loan? A home loan is when you borrow money from a lender or bank to assist in buying a residential property. It may also be applicable for the construction of a new house.
What is a loan against property? A loan against property is when a borrower avails of a loan to fund a purpose (for example, a wedding) by pledging their property as a security against the loan.
Home Loan vs. Loan against Property: Points of Difference
To meet any emergencies or financial goals, borrowers prefer applying for a secured loan. While financial institutions render various credit options for various kinds of life events, some may get confused between the two concepts of a home loan and a loan against property that sound the same but are not so. Let’s understand the major points of difference.
Usage
As mentioned earlier, a home Loan in India must be used specifically for purchasing a plot, house, or an under-construction property. A loan against property can be used for any purpose – be it a wedding, buying a new car, medical emergencies, debt consolidations, or business purposes. The reasons to apply for a loan against property can vary.
Income Tax Deductions
When it comes to income tax savings, a housing loan borrower in India is eligible for tax deductions up to INR 1.5 lakh on the principal home loan amount following Section 80C. On the other hand, not many tax deductions are available for LAP, except if the home loan amount is utilized to fund a new property following under 24 of the ITA.
Documentation
In the case of a housing loan, the documentation process is simple. Some lenders, however, can take about two weeks to complete the entire process, including documentation and verification. But in the case of a loan against property, it can be comparatively longer as lenders have to do a thorough check of the loan against property documents, property details, property ownerships, etc.
Loan to Value
A lending institution considers income, job type, and job security before approving a home loan. The loan amount from a loan against property is dependent on the current market value of that particular property.
Typically, you may get 75% to 90% of the housing loan amount, while 60% of the amount is sanctioned in case of a loan against property. But the percentage varies from one lender to another.
Interest Rate
Most of us, as borrowers, almost always consider the rate of interest along with other factors. As compared to a home loan, a loan against property comes with a high-interest rate. If you are availing of a home loan from any reliable lending institution, you can avail of the loan at an interest rate of 6.70% p.a. You can also avail of a loan against property at a low rate of 8.35% p.a.
Now, here’s a look at the similarities between the two:
Both loans are used to cover high-end expenditures
Both are secured loans having long tenors for repayment; the loan repayment tenor in both cases can go up to about 20 to 30 years
Borrowers get the option of balance transfer with both
Top-up loans and such features are also available, based on the lender, with both these loans
Concluding Thoughts
Now that you are aware of the differences between an NBFC loan against property and a home loan, we recommend using a LAP loan calculator and a home loan calculator to estimate the EMIs and other loan-specific details before you decide to take either of these loans.
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