Comparison of Loan Against Property and Personal Loan

In today’s rapidly paced financial landscape, both individuals and companies often require credit for a variety of reasons, for example, an emergency medical situation, education, growing a business, and home renovations. Of the range of financial products offered by banks and NBFCs in India, Loans Against Property (LAP) and Personal Loans are most likely the two most utilized loans in India. Borrowers can close a LAP or Personal Loan to gain liquidity, but each works differently and differs vastly in terms of loan structure, interest rate, qualifications, and application process.

In this comprehensive guide, you will be provided with the major differences, advantages, and disadvantages, qualification, rate of interest structure, and the best use of the two tools to allow you to make an informed decision as per your financial requirements.

 

Loan Nature and Definition

Loan Against Property (LAP)

LAP is a secured loan where the borrower pledges residential, commercial, or industrial property as collateral, or industrial property as security. The lender decides the loan amount based on the market value of the property, usually between 50% and 70% of its price. say 50% to 70%.

• Secured Loan: Yes (Property as collateral)
• Loan tenure usually lasts 5 to 15 years, and the lender may extend it further.
• Loan Amount: ₹5 lakhs to a few crores
• Purpose: Business expansion, study, health requirement, debt consolidation, home renovation

Personal Loan

A Personal Loan is an unsecured loan sanctioned based on the credit rating, income, and professional status of the borrower. Banks sanction personal loans quickly since they don’t require collateral.

• Secured Loan: No (Unsecured)
• Loan Tenure: 12 months to 60 months
• Loan Amount: ₹10,000 to ₹50 lakhs
• Purpose: Medical expenses, travel, wedding, education, debt restructuring, minor home improvements

 

Major Differences

• Loan Against Property (LAP) and Personal Loan differ quite dramatically as far as some very critical factors are concerned. To begin with, LAP requires the borrower to collateralize his/her residential, commercial, or industrial property, while a personal loan is completely unsecured, and no asset pledge is required.
• The LAP interest rates are lower, typically between 8% and 14% per year, since the risk for the lender is lessened with the use of collateral. Personal loan interest is comparatively higher, typically between 10% and 24% per year, as the lender takes a higher risk.
• Where the amount of loan is in question, LAP offers fairly huge amounts, which differ in proportion to the market value of the property between ₹5 lakhs and some crores. Banks offer smaller personal loans—between ₹10,000 and ₹50 lakhs—based on the borrower’s salary and credit record.
• The LAP term is also longer, up to 15 years, and as such, is best used for long-term financial plans like business expansion or home renovation. Personal loans are typically short-term, ranging from 12 months to 5 years.
• LAP processing is comparatively time-consuming due to obligatory property valuation, legal screening, and intricate documentation, which can take 7 to 15 days. Banks usually disburse personal loans within 1–7 days because they require minimal documentation.
• From the point of view of risk from the borrower, LAP is riskier because the asset can be repossessed in case of default. The personal loan is not risky to lose the asset, but the high interest rate makes the cost of repayment higher.
• Borrowers must submit elaborate documents for LAP, including property title papers, income proof, identity proof, and KYC. For personal loans, the paperwork is simpler, requiring only ID, address, and income proof. Comprising mainly ID proof, address proof, and income proof.
• Last but not least, LAP repayment flexibility is average with systematic tenure and EMI values, though prepayment facilities are provided by most of the lenders. Personal loans are more flexible with liberal pre-closure facilities and repayment options.

 

Advantages

Loan Against Property (LAP)

1. Greater Loan Amount: Since the loan is secured, banks offer higher amounts, which are beneficial for substantial financial requirements like business expansion or large medical bills.
2. Low Interest Rates: Since the loan is secured, the risk for the lender is lower, so interest rates are lower than those for personal loans.
3. Longer Repayment Term: Lenders allow repayment terms of up to 15 years, which gives borrowers lower EMIs and easier financial planning.
4. Tax Benefits: Occasionally (mostly for business or house extension), the borrowers can claim tax benefits under Section 24(b) of the Income Tax Act.
5. Financial Discipline: A well-defined long-term repayment plan helps borrowers demonstrate disciplined repayment habits.

Personal Loan

1. No Collateral Needed: Best for individuals who do not own a house or would not want to mortgage their homes.
2. Quick Disbursement: Banks process and disburse personal loans within 24–72 hours.
3. Flexible Usage: There is no limit on utilizing funds, and it is excellent in case of an emergency or personal requirements.
4. Less Paperwork: Personal loans involve much smaller paperwork in comparison to LAP, and hence, the process is much simpler.
5. Best for Small Requirements: Ideal for small and short-term financial needs.

 

Disadvantages

Loan Against Property (LAP)

1. Chattel Mortgaging of Property: If the borrower defaults, the lender seizes and auctions the property.
2. Long Process: Since there is legal verification and valuation of property, LAP processing is a long process.
3. High Default Penalty: Since it is a secured loan, default would involve loss of property.
4. Restrictions on Property Use: There are some restrictions by some lenders on the use of the property during the loan tenure

Personal Loan

1. Higher Interest Rates: Since it is an unsecured loan, interest rates are extremely high compared to LAP.
2. Lower Loan Amount: The loan amount typically depends on the income as well as the credit rating of the borrower.
3. Shorter Repayment Period: This leads to higher EMI values.
4. Impact on Credit Score: Default payment greatly impacts the credit score due to its unsecured nature.

 

Eligibility Criteria

To get a Loan Against Property (LAP), the applicant must be between 21 and 65 years old. The applicant should have a regular income-generating source of salaried employment, self-employment, or business activity. A minimum of ₹25,000 as monthly income is required, although this may be higher or lower depending on the lending institution and loan size. The lowest credit score of 700 is the lowest that most banks require to trigger interest rates.

Applicants must also own a marketable property with valid title documents. Lenders typically require proof of at least two years of sustainable income. Property deeds, proof of address and identity, bank statements, income tax returns, and the business documents for self-employed applicants are the documents required.

For Personal Loans, the age is slightly relaxed. The ideal age would be between 21 and 60 years. Salaried and self-employed people are taken into consideration. The minimum salary criterion is generally ₹15,000/month, but it could be different with banks. Most banks accept a minimum credit score of 650.

Most importantly, you don’t need to own a property to get a personal loan. The business or job should be at least one year old. Required documents are address and identity proof, salary slips or bank statement, PAN card, and income tax return (if self-employed).

 

Rate of Interest Comparison

Loan Against Property (LAP)

• Typical Rate Range: 8% – 14% per annum
• Lower interest rates due to collateral.
• Interest could be fixed or floating.

Personal Loan

• Typical Rate Range: 10% – 24% per annum
• High income stability, bank/NBFC dependent, and credit score.
• Generally, a floating rate.

 

Use Case Suitability

When to avail a Loan Against Property (LAP)?

1. Business Expansion: For business owners who want to pump money into the business.
2. Home Maintenance: Financing large home repairs.
3. Debt Consolidation: Handy while repaying multiple high-cost debts.
4. Medical Treatment: Financing costly medical treatments.
5. Education Loan Top-up: For higher studies when regular education loans are not sufficient.

When to go for a Personal Loan?

1. Small Emergency Outgoes: Medical emergency, sudden travel requirements.
2. Weddings: Wedding loans are short-term, where quick disbursal is a priority.
3. Short-term Liquidity Requirement: Instant liquidity without showing property documents.
4. Purchase of Consumer Durables: Buying appliances, gadgets, or a car.
5. Vacation and Travel: When there’s an urgent need for money for personal vacations.

Tax Implications

• Loan Against Property: Interest on a LAP qualifies for deduction in the case of tax under Section 24(b) of the Income Tax Act, in case it is applied for business purposes or any improvement to the house.
• Personal loans are not tax-deductible unless they are used for business purposes

 

Application Process

Loan Against Property (LAP)

1. Property Assessment: The bank checks the current market value of the property.
2. Submission of Papers: Long paperwork—documents of property, evidence of income, identification proof, etc.
3. Credit Analysis & Income Assessment: The lender verifies the borrower’s repayment ability.
4. Once legal and technical verification is complete, the bank sanctions the loan.

Personal Loan

1. The application process is simple and requires very few documents, like ID proof, address proof, and income proof.
2. Credit Verification & Income: Verified on CIBIL score and stability of income.
3. Speedy Sanctioning: Loans are sanctioned and disbursed within 24-72 hours in the majority of instances.

 

Risk Factors

The greatest risk in a Loan Against Property is the risk that the property may be lost on default. If the borrower fails to repay, the lender repossesses and auctions the property. Additionally, DWhen borrowers default, their credit scores drop sharply and they face financial losses.

Over-borrowing is a threat in LAP. Since the amount of the loan depends upon the value of the property, the borrowers are able to borrow more than they can repay and fall into financial difficulty in the future. But due to the highly stringent verification process of income and property, the possibility of documentary fraud is zero.

Lenders can charge a prepayment penalty in LAP, though the charges are usually lower because the loan is secured. The cyclical property market also creates another risk. When property prices decline, the lender’s loan-to-value ratio goes down. In that case, the lender may ask the borrower to provide more collateral or pay bigger EMIs.

However, the main risks of personal loans are related to money. There is no danger of loss of property because there is no security involved. Defaulted payments do have an impact on the credit history of the borrower, which makes future loans more difficult or more expensive.

Personal loans are easy to get, and that makes it more likely that a person will over-borrow. Some borrowers take two or more personal loans and ultimately fail to repay them. Also, since the authentication process is less stringent compared to the LAP, there is a chance of fraud or misrepresentation if the lender has not conducted sufficient due diligence.

Prepayment charges on personal loans are typically zero or nil, depending on the policy of the lender. Because there is no security, changes in the real estate market have no influence on personal loans whatsoever, even though stability in the income of the borrower still remains an important factor to remember.

 

Conclusion 

If you need a large loan for a long period, such as for business expansion, home renovation, or debt consolidation, a Loan Against Property (LAP) is suitable. LAP offers lower interest rates, higher loan amounts, and longer tenure. However, if you default, the lender can repossess your property.

For quick funds in emergencies like medical issues, weddings, or travel, a Personal Loan works better. Banks disburse these unsecured loans quickly with minimal documentation. They usually carry higher interest rates and shorter tenure.

Choose LAP for major planned expenses. Opt for a Personal Loan when you need a smaller amount urgently without risking assets. Always assess your financial capacity before taking either loan.