A few years back availing loans was a very tiresome task. The long waiting period to get your loans approved has been shortened with the new technologies. However, one question still comes to everyone’s mind while looking for funds is whether to choose a loan against property (secured loans) or an unsecured one. There are various events and situation in life when money becomes a constraint. Loans are a saviour in such a situation, but to avail one you need to know which one is better for you and your goals.
What Is A LAP Or Loan Against Property?
When you avail funds keeping your property as a mortgage, it is known loan against property. Bank or financial institution keeps your property as collateral security for giving you the fund you require. The amount of loan against property is generally 40%-60% of the market value of the property. It is known as Loan to value or LTV. Loan against property comes under the secured loan category. It is regarded as one of the cheapest loans in the Indian market. The rate of interest is determined according to the value of the loan and the prevalent market rate. It is generally around 11%-16%, and the loan is repaid in equal monthly installments (EMIs).
What Are Unsecured Loans?
Unsecured loans as the name suggest do not require any collateral security or mortgage of assets. These loans can be availed if you have a sound financial history and fulfill the minimum monthly income criterion of the bank/financial institution. Most of the personal loans, credit card loans, and business loans are unsecured and depends on your financial credibility.
How to Choose Between The Two?
The choice between loan against property and the unsecured loan has to be well analyzed. You need to make an analysis on the basis of following points:
Purpose of Loan: One of the major factors which people ignore while choosing loans is their purpose of availing it. Loan against property and unsecured loans can be availed for the same purpose, but do you think mortgaging your home just to fund a vacation is a rational choice? You need to prioritize your assets while mortgaging it for funding your financial aspirations.
Loan Tenor: Your tenor for a loan against property can be up to fifteen years. However, for an unsecured loan, the maximum tenor is around five years. If the tenor is longer, it helps in reducing the EMIs. If the EMIs are small, you can afford to take up a big loan. In the case of an unsecured loan that is not possible. However, if the tenor is longer, it means you are paying a lot more than what you availed as the interest will be more for longer tenor.
Processing Time: If you want a quick disbursal of your loan, you need to go for unsecured loans. As in the case of a loan against property, the processing time is huge. Financial institution where you apply for LAP and pledge your property will scrutinize the property, its market value, LTV and other conditions to approve the loan. You have to submit ownership documents of the property, your income proofs, and other supporting documents. Once all these documents and collaterals are verified, then your loan will be approved. However, if you are in a hurry, personal loans can be disbursed in a few days. If you have a good credit rating and monthly income, you can avail personal loans quickly.
Amount of Loan: If you need a loan of a higher amount, it is better to choose a loan against property. Since the amount of loan in LAP is calculated as a percentage of the market value of the mortgaged property. Generally, the loan amount in LAP goes up to 60%-70% of the market value. You can also get the loan amount in a lump sum. Amount of loan is limited to your income and repayment capacity while availing an unsecured loan. The financial institution will evaluate your income and present debt to sanction the loan. If you have low income or already under heavy debt, they might not sanction a loan or approve a lower amount.
Interest: the Interest rate is higher for unsecured loans as the risk of default is higher. It can go up to 24% if the risk of the borrower seems high to the lender. On top of that, these loans are not pledged against anything; thus the lender cannot recover the amount if the borrower default in repaying. In case of loan against property that can be done. If the borrower cannot pay the loan back, the lender can take over the mortgaged property and auction or sell it and recover losses. This is why the interest rate on LAP is lower and hovers around 11%-16%.
Eligibility: In the case of unsecured loans, eligibility is defined by credit scores and earnings of the borrower. For LAP, it is mainly the property which you want to mortgage matters.
While choosing your next loan, keep these points in mind so that you can find the best for yourself.