Many individuals mix up the phrases “home loan” and “loan against property” even though they are both necessary but serve different functions. While a home loan is a loan used to purchase or build a home, a loan against property is a loan used for any purpose with the use of a residential or commercial property as collateral. Property-based loans typically have lower interest rates than other types of financing. In contrast to home loans, they are more expensive. Let’s talk about the differences between these two loan forms.
Property Loan Vs Home Loan
A home loan is provided at comparatively lower interest rates than a loan against property. To make housing affordable for everyone, the government and the RBI have reduced the cost of taking out a home loan. Given the likelihood of default, interest rates for loans against property are somewhat higher in comparison. A loan against property is only available at a minimum interest rate of 9.50%, although a home loan can be obtained for as little as 8.70%.
Loan to value ratio
A home loan can get you up to 90% of the value of a property, whereas a loan against property can only get you up to 60% of the value. Before approving a home loan, banks and other lending organizations frequently inspect the property. Similarly to this, the lender evaluates the property before authorizing a loan secured by it. The state of the asset used as collateral for the loan against property also has a significant impact on how much interest will be charged by the lender.
A home loan can only be used to purchase or acquire a home, a building lot for a home, a property that is under construction, etc. However, borrowers can use a loan against property for any purpose, including business expansion and personal expenses like education, marriage, etc. These loans, however, cannot be utilized for speculation.
Top-up loan choices are not available to borrowers of home loans, but some lenders might do so following a careful evaluation. With a loan against property, you have the option of receiving additional funds on top of the original loan amount. This gives you greater freedom and enables you to use it for a variety of financial commitments as well as in an emergency.
The term of these loans is the first thing that comes to mind when comparing property loans and home loans. Home loans can be obtained for up to 30 years and have a longer term. The majority of loan against property, however, is only offered for a maximum of 15 to 18 years due to the significant risk involved.
The tax exemption that is provided for the two loans may be the most obvious distinction between them. While loans against property often don’t provide borrowers with any tax advantages, house loans do. One may deduct the interest on a home loan under Section 24 of the Income Tax Act, and under Section 80C, one may receive tax benefits for paying back the real principal amount in a given fiscal year. However, a borrower can also benefit from a tax exemption on a loan against the property if the funds under LAP are used to construct a residence.
The period needed for approval and sanctioning in the case of a home loan is roughly 15 days. However, the time needed is proportionally significantly longer in the case of a loan against property. Before approving and sanctioning a loan for a loan against property, banking institutions and NBFCs (Non-Banking Financial Companies) conduct extensive checks on the property information and personal information provided by the borrower or applicant. Lenders typically take longer to approve LAP since these loans carry a higher risk.
A borrower may readily distinguish between them after reviewing and taking into account all the information related to the comparison between home loans and loans against property, and then they can prioritize their needs. The borrower can review and evaluate the many loan possibilities offered by several banks and NBFCs now that they are aware of the distinction between a property loan and a house loan, choose the best loan type based on their needs, and reap the benefits of each.