Many people confuse the terms home loan and loan against property — Both are required for different purposes. While a home loan is a loan availed of to buy or construct a home, a loan against property is availed of by keeping a residential or commercial property as collateral and the money received can be used for any purpose. The interest rates on loans against property are usually lower than other credits. However, they are higher than that charged on home loans. Let us discuss the difference between these two types of loans.
Property Loan Vs Home Loan
Interest Rate
Compared to a loan against property, a home loan is offered at comparatively lower interest rates. The government and the RBI have minimized the cost of taking a home loan to make housing affordable for all. Comparatively, the interest rates for loan against property are somewhat higher, as the chances of default are high in this case. A home loan can be availed of at as low as 8.70% onwards, whereas a loan against property is offered at a minimum of 9.50% onwards.
Loan-to-Value (LTV)
A loan against a property will fetch you up to a maximum of 60% of the property value and a home loan will get you a maximum of up to 90% of a property’s value. Banks and lending institutions usually visit the property site before sanctioning a home loan. Similarly, before a loan against property is sanctioned an evaluation of the property is done by the lender. The condition of the property used as collateral against which a loan against property is availed of also plays an important role in helping lenders decide the interest rates to be offered.
Purpose
A home loan can only be availed of for purposes, such as buying or procuring a home, a plot for constructing a home, under-construction property, etc. However, a loan against property can be used by borrowers for any purpose, such as business expansion and for personal use like education, weddings, etc. However, such loans cannot be used for speculative purposes.
Top-up option
Home loans do not offer top-up loan options to a borrower but some lenders may provide the same to a borrower after a thorough assessment. In the case of a loan against property, you can avail of additional funds over and above the existing funds. This gives you more flexibility and allows you to use the same for multiple financial obligations and in case of any emergency.
Tenor
When we think about property loan vs home loan, the first thing that comes to mind is the tenor for such loans. Home loans have a longer tenor and can be availed of for a maximum of 30 years. However, most loans against property are provided for a maximum of up to 15-18 years as the risk is much higher in the case of these loans.
Tax Exemption
Perhaps the most noted difference between the two loans is the tax exemption available for them. While loans against a property usually offer no tax benefits to the borrowers, home loans do come with attractive tax benefits. Under Section 24 of the Income Tax Act, one can claim deductions on the interest paid on the home loan and under Section 80C, tax benefits can be claimed for the repayment of the actual principal amount in a financial year. However, if the money under LAP is used to build a home, a borrower can enjoy tax exemption on a loan against property as well.
Documentation Process
In the case of a home loan, the time duration required for approval and sanctioning takes approximately 15 days. However, in the case of a loan against property, the time required is comparatively much more. In a loan against property, the banking institutions and NBFCs (Non-Banking Financial Companies) perform thorough checks on the property details and personal information provided by the borrower or the applicant before approval and sanctioning of the loan. Since these are high-risk loans, lenders usually take longer to approve LAP.
Summing Up
Thus, after checking out and considering all the information associated with the comparison between home loans and loans against property, a borrower can easily differentiate between these and prioritise their requirements. Now that the borrower is aware of the difference between a property loan vs home loan, they can check and compare various loan options offered by several banks and NBFCs and select the right loan type depending on their usage and get the maximum benefit out of each.
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