In India, often people tend to use the term home loan and loan against property interchangeably. However, the truth is these are completely different loan products. Read on to know the exact difference between the two.
Today, in India, you can find a wide variety of loans that serve different purposes. And, if you are a first-time borrower, it is easy to get confused. A prime example of this is home loan and loan against property (LAP). Many people tend to use these terms interchangeably. But, these are different loan products and serve different purposes. Let us know more about the differences between home loan and LAP.
What is a home loan?
As the name suggests, a home loan is a type of credit that you can avail to purchase a ready-to-move-in property or a home that is under construction or even a plot of land on which you want to build your home. A home loan is a secured loan that you can avail from a bank or NBFC (Non-banking Financial Company).
Before you avail a home loan, you must make a down payment (20% of the property’s value); it is a part of the home loan application process. The lender charges a fixed or floating interest rate on loan, and you must repay the loan in EMIs, and the ownership of the property remains with the lender until you repay the full amount.
What is a loan against property?
A loan against property is a type of mortgage wherein you can pledge your asset to the lender and get a credit against it. The amount of money you get against the property depends on the value of the property; generally, the lenders in India provide up to 50% of the property’s value as loan. In some cases, if the borrower has an existing relationship with the lender, they can get up to 60% of the property’s value as a loan.
Difference between home loan vs loan against property
The home loan and loan against property are different in more than one ground. The most significant differences are listed below:
The interest rate for home loans tends to be slightly lower than the loan against property. The main reason for this is that the chances of default on LAP are higher than the usual home loans. Additionally, the home loan rates are lower because of the various government of India initiatives like the PMAY that offers a subsidy on the interest rate for eligible buyers.
The interest rate for LAP also varies based on the type of property you pledge. Generally, you can get LAP at a lower interest rate if you pledge a self-occupied residential property than the commercial property.
End usage of the loan
Another major difference between LAP and home loan is the purpose for which you can avail the loan. Home loans can be availed only for buying a new home, home construction, home renovation, etc.
The lenders do not have any restrictions on the end usage of the LAP. You can use the amount for any purpose you want, including paying business liabilities, medical expenses, child marriage/education fees, etc.
Loan to value ratio
When you apply for a home loan, the lenders generally finance up to 80% of the property’s market value. But, for LAP, the maximum amount you can get is up to 50-60& of the property’s value as evaluated by the lender.
This is another important factor that affects the affordability of the loan. Home loans have a longer duration; you can get a home loan for a maximum term of 30 years. But, loan against property has a shorter term, and the maximum period for such loans is 15 years.
Thus, it is quite evident that home loans and LAP are not the same, and they both serve different purposes and have their own set of rules and regulations.