Loans are the lifeline of both the consumer and producer market. Banks and NBFCs extend loans to businessmen so they can invest, which, in turn, promotes economic growth. They also sanction loans to individuals to meet personal needs. The requirement can be of any type and the lending institutions also have different products for different purposes. For example, to fund the purchase of a house one can avail a home loan, for business purposes, one can get a business loan and the list goes one. However, the two most important and unique credit products in this pool are Loan Against Property (LAP) and Personal Loan.
Both the LAP and Personal Loan have a few things in common, but the major characteristic that define them run opposite. This equally affects the places and things in which they should be deployed and also the borrowers who are availing the loan. In other words, there is a set of points that are imperative in making the decision. Before proceeding to those factors, let us have a brief understanding of what LAPs and Personal Loans are.
Loan Against Property (LAP)
As the name suggests, it is a secured loan, in which, the borrower has to keep an asset as a mortgage with the lending institution. There is a margin deciding the maximum loan amount, which is basically how much of the property’s market value can be sanctioned as loan. Usually, the lender sanction loan amounts equalling to 50-70% of the market value of the collateral. LAP is also known as a mortgage loan and the mortgaged property can be auctioned by the lender to recover the loan amount if the borrower fails to repay the loan.
Unlike LAPs, personal loans are unsecured credit sources, in which, the borrower is not required to keep any property as a mortgage with the lender. Hence, a personal loan is sanctioned solely on the basis of the applicant’s income and his credit history. The maximum loan amount that can be sanctioned for an individual also depends on the credit score and his repayment ability. Lending institutions refrain from disbursing loan amount, which will result in making the overall EMI more than 40-50% of the borrower’s net monthly income.
How to choose the right one between LAP and Personal Loan
A borrower should evaluate his needs, capacity and resources at his disposal before availing a loan. All these also help an individual to decide whether he should opt for a LAP or a Personal Loan.
Interest Rate that the borrower can afford
It is recommended that you should go for a LAP and not a personal loan if you have something to keep as a mortgage. The reason is obvious as LAPs are much cheaper than personal loans. The rate of interest in LAPs ranges from 12-17% compared to 15-24% in personal loans. In addition to that, if you can afford prepayment, the cost-effectiveness of LAPs increases manifold.
Tenure in which the loan can be repaid
If you have a proper assessment of your loan repayment ability and have pre-planned the budgeting, then personal loans should be the first priority. Although personal loans have a higher rate of interest, the absence of a collateral requirement comes handy and carries much less risk when seen from the borrower’s perspective. The LAPs do offer much more flexibility in choosing the policy tenure the fact that it requires submission of collateral, makes borrowers turn away.
Resource at disposal
The only thing that makes personal loans a better option over LAPs is that they don’t require a mortgage. But if you are sure about repayment of the loan in the prescribed amortization period and have a property of value more than the loan amount you need, then a LAP is undoubtedly the best thing to go for. Except for the lack of collateral requirement, the LAPs bring every merit of personal loans. Moreover, collateral does not only mean tangible assets. You can also use your FD, shares, LIC policy, etc as collateral to avail a LAP.
A borrower availing a personal loan has to deal with fewer formalities than in the case of a mortgage loan. It is because lenders have to evaluate collateral’s market value and also need to verify the ownership of the property. All these are absent in personal loans. Hence, the sanctioned loan amount is disbursed in less than 7 days in the case of personal loans and the same can take 15-30 days in LAPs. So, if you are in an urgent need of money, applying for a personal loan is probably the safest option.
The credit score you have
The options are much clearer in this case. If you have a certain credit score which is not enough for the lenders to extend a personal loan, the LAP is the only option left for you to finance your needs. On the other hand, if you are enjoying a healthy credit history and don’t want to tie an owned asset with the lender, availing a personal loan is the perfect option.
All these have been the difference or to say, the distinguishing feature of LAP and Personal Loan. The feature that is shared by both of them is that they offer the utmost flexibility in terms of usage. Be it a medical emergency, urgent need to fund travel, educational requirement, etc. a personal loan or a LAP can be used to finance any such monetary need. Both have their own merits and conditions. All these translate into different formalities and documentation.One must check and calculate his requirements and needs, along with affordability before applying for a LAP or a personal loan.