In some situations, borrowers might be totally confused in making a decision. For important financing needs such as the purchase of a house or for higher education funding, there are two alternatives: home loan or LAP.
Both are secured but serve different purposes with unique pros and cons. This article will explore their differences, characteristics, benefits, and how to determine which option is best for your needs.
Home Loan vs. Loan Against Property: Key Differences
| Feature | Home Loan | LAP |
| Purpose | Buying, constructing, or renovating a home. | Any financial need (business, education, medical, etc.) |
| Collateral | The property being purchased itself. | Any existing residential/commercial property |
| Interest Rates | Lower (8.50% – 9.5%) | Slightly higher (9.50% – 11.5%) |
| Loan Tenure | Up to 30 years (lower EMIs) | Up to 15-20 years (higher EMIs) |
| Tax Benefit | Available under Section 80C & 24(b) | No tax benefits unless used for construction. |
| Usage Restriction | Restricted to housing-related expenses. | Flexible usage |
| LTV | Up to 90% of property value. | Up to 75% of property value. |
| APPROVAL PROCESS | Takes longer due to property verification | Faster as property is already owned |
| Risk Factor | Lower, as the purpose is predefined | Higher, as the loan usage is flexible |
| Who Should Apply | If you want to buy or renovate a home. | If you need funds for personal or business needs |
Bonus Insights
- Risk of Property Seizure: Defaulting on LAP could lead to property loss. Home Loan default usually leads to restructuring before foreclosure.
- EMI Affordability: Home Loans offer smaller EMIs due to longer tenure, making repayment easier. LAP has a shorter tenure, leading to higher monthly EMIs.
- Ideal for Business Owners: If you’re a self-employed individual, LAP is a better option since it provides funds without end-use restrictions.
- Best for First-Time Home Buyers: A Home Loan is ideal for individuals looking to buy their first home and benefit from tax deductions.
Understanding Home Loan
A home loan aimed to aid individuals to purchase, construct, or rehabilitate a residence. The loan is secured by the property that is being constructed or acquired. This makes lenders consider it a safer loan. Such a condition allows longer repayment tenures and lower interest rates.
Example:
Ronit is going to purchase a new flat for ₹50 lakh. The Home Loan application has been approved for an amount of ₹40 lakh (80% of property value) at 8.5% interest rate for a tenure of 20 years. EMI will become approximately ₹ 34,587 each month.
Understanding Loan Against Property (LAP)
In the case of Loan Against Property, people put their existing properties to raise funds. These may be for their personal needs, business expansion, education, or health-related expenses. The loan amount is determined by the current market value of the property being pledged.
Key Features of LAP
- Purpose: Can be used for any legal financial need including business, education, medical expenses, or personal use.
- Loan Tenure: Typically ranges up to 15-20 years, shorter than home loans.
- Interest Rates: Higher than home loans, starting from 9.50% per annum.
- Tax Benefits: No tax benefits unless the loan is used for property purchase or construction.
- LTV Ratio: Lenders offer around 50%-75% of the property’s market value.
- Processing Time: Faster processing since the property is already owned.
Example:
The property worth₹1 crore owned by Prerna is her commercial property. She requires ₹50 lakhs for business expansion. For it, she has taken a Loan Against Property at an interest of 9.75% for 15 years. Now she has to pay an EMI of approximately ₹52,737 monthly.
Difference Between Home Loan and LAP
| Feature | Home Loan | Loan Against Property (LAP) |
| Purpose | Buying, constructing, or renovating a house. | Any legal financial requirement. |
| Margin (LTV) | Up to 90% of property value | Up to 75% of property value |
| Tenure | Up to 30 years | Up to 15 years |
| Tax Benefits | Available under Section 24(b) & 80C | Not available (except in property purchase cases) |
| Interest Rate | Starts from 8.50% | Starts from 9.50% |
| Processing Time | Takes longer due to extensive verification | Faster processing |
| Risk Factor | Lower risk as it is for a specific purpose. | Higher risk due to unrestricted usage. |
Interest Rate Comparison: Home Loan vs. LAP (Major Banks & NBFCs)
| Bank/NBFC | Home Loan Interest Rate | Loan Against Property Interest Rate |
| SBI | 8.50% onwards | 9.95% onwards |
| HDFC | 8.55% onwards | 9.90% onwards |
| AXIS | 9.00% onwards | 11.25% onwards |
| PNB Housing | 8.75% onwards | 10.00% onwards |
| LIC Housing Finance | 8.50% onwards | 10.50% onwards |
Making the Right Choice
The choice between a Home Loan and a LAP depends on your financial needs and goals.
Choose a Home Loan if:
- You are purchasing, constructing, or renovating a house.
- You want lower interest rates and longer tenure.
- You want to enjoy tax benefits on the loan amount.
Choose a Loan Against Property if:
- You need a large sum for business, education, medical, or personal use.
- You own a property and want to use it as collateral without selling it.
- You prefer a quicker approval process with flexible fund usage.
Conclusion
Loan Against Property is very beneficial in times of emergency; however, home loans are meant for long-term borrowers for lower interest rates, and tax benefits apply to these loans. Before deciding which one suits your purposes better, check the variation in interest rates, tax advantages, and other considerations along with your financial objectives and repayment capacity. The pre-purchase and purpose of that loan, reviewing the options, will surely create the accurate reflection of your financial objectives.
Are You Prepared to Submit an Application?
Compare lenders, assess your demands, and select the best loan offer. Thus you can guarantee your financial security free from needless stress.
FAQs
Q: What are the basic eligibility requirements to be eligible for a home loan or LAP?
A: Both require stable income, good credit score, and property ownership (for LAP).
Q: Can I take a Loan Against Property without income proof?
A: Some lenders offer LAP based on property value but may charge higher interest rates.
Q: Is it possible to turn a loan secured by property into a home loan?
A: No, they are separate lending products with unique requirements and objectives.
Q: Which loan has lower EMI – Home Loan or LAP?
A: Home Loan has lower EMIs due to longer tenure and lower interest rates.
Q: Does LAP affect my home ownership?
A: No, but defaulting on payments can lead to property seizure by the lender.
Make a wise decision and secure your financial future with the right loan choice!