You may need funds for various objectives, such as children’s education, vacation, or business expansion. Until a few years ago, availing of funds was difficult. However, lenders today offer various types of loans to meet your funding requirements.
Financial institutions offer secured and unsecured loans, such as business, home, personal, and other types of loans. You may use one or more credit facilities based on your eligibility and individual requirements.
With the availability of multiple options, making the right choice also becomes confusing. Considering some factors, such as the equated monthly installment (EMI), loan tenure, interest rates, and loan to value (LTV), will help you make an informed decision.
Secured credit facilities like a loan against property (LAP) have certain benefits. On the other hand, unsecured facilities like personal loans have their pros and cons. Here is an insight into the LAP and other unsecured loans for further understanding.
Loan against property
LAP is a secured loan from banks and non-banking financial companies (NBFCs). You need to mortgage your property against the amount to avail of the funds. The loan amount depends on the property value, known as the LTV. Based on the tenure and the loan against property interest rates, the amount is repaid in pre-determined EMIs.
Some of these include personal loans or facilities against your credit card. You do not have to mortgage any property or another asset when you avail of such loans. It would help if you had a strong credit history and a high credit score to qualify for unsecured loans.
LAP vs. unsecured loans
Although both options have their benefits and disadvantages, the four differences are below.
1. Interest rates
Because LAP is a secured loan, the interest rate on a property mortgage loan is lower. Lenders assume a higher risk with unsecured loans and levy a higher interest rate. You should apply for a LAP if you can mortgage a property. Moreover, the EMI is lower when you avail of a LAP.
The maximum tenure for a LAP is 15 years, while unsecured loans are available for shorter durations. When you avail of a loan for a longer term, the EMI is lower. Therefore, choosing aagainst your property is advisable if you want to apply for longer loan tenure.
Fewer documents are needed for an unsecured loan. On the other hand, LAP requires meeting more documentation requirements. This is because you need to furnish the loan-related documents in addition to your documents. Therefore, the processing time for a LAP may be more than that for an unsecured loan.
Lenders consider your income, credit score, and age to determine your eligibility. The important eligibility criteria for unsecured loans are your credit history and income. In comparison, the property value is of greater importance when applying for a LAP. If you have a higher credit score, can afford high interest rates, and do not have an asset, you may avail of an unsecured loan.
You may consider a LAP or unsecured loan based on the points above. Furthermore, which of the two options is suitable depends on your requirements and personal situation.