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Home loan vs personal loan: Which one should you choose?


Loans: A useful financial instrument

Loans assist you in making purchases, covering a short-term cash flow gap, or building a long-term asset like a home. Most financial institutions, including banks, non-banking finance companies (NBFCs) and housing finance companies (HFC), provide a wide range of loans to meet consumers’ various requirements.

Home loans and personal loans are both available to customers, depending on their specific needs. For the most part, borrowers seek out home loans when they are ready to make a purchase on their own. On the other hand, if you need a little more money for a down payment, a personal loan may be the perfect solution.

Let us understand home loan vs personal loan in-depth.

 

What is home loan

With a home loan, you may borrow the money you need to make the down payment and purchase a property without having to spend all of your funds. Nowadays, banking and other financial institutions provide a variety of home loans.

 

What are home loans used for?

  • Purchasing an existing home or apartment 

One of the most prevalent kinds of home loans is for the acquisition of new or used property. Many banks provide this kind of loan in various configurations.

Land purchase loans are available from several institutions. It is a flexible choice to purchase a piece of land since the buyer has the option of saving money and building a home when his resources allow it or simply keeping the land as an asset or investment for the long run.

See also: What are plot loans?

  • Constructing a new home 

The loan disbursement in this scenario is intended for individuals who want to build a home from the ground up rather than purchase one that has already been built. This kind of loan has a unique approval procedure since it considers the cost of the land, as well.

  • Renovating an existing home

Many financial institutions provide loans for home improvement projects, including repainting, overhead water tank installation and electrical restoration, among other things.

Banks also provide loans for home expansion, which may include alterations to the existing structure, as well as the integrations of additional rooms, balconies, etc.

 

What is a personal loan?

The bank lends money to individuals, based on their creditworthiness and this loan does not require any kind of collateral in exchange for the loan.

 

What are personal loans used for?

In India, marriage is a significant life event that is also a significant financial commitment. A wedding loan from a bank may go a long way toward making your big day more special. Anyone in the family, including the future bride and groom, may take out a loan to help with the wedding expenses.

With travel loans, you may take a trip across the globe and pay off your debt afterward. Travel insurance is frequently included with holiday loans, so you are covered on all fronts.

As pension loans are only available to retired individuals, the normal qualifying requirements do not apply to this unique programme. Some institutions provide 6-10x with the income the retiree received the month before filing the loan request under this program.

Other prominent personal loans are:

  • Consumer durables loan
  • Agricultural Loan
  • Personal computer loan, etc.

Personal loans offered by certain institutions may go beyond those mentioned above.

Most of the time, women are eligible for unique personal loan offers with different terms and conditions than men. For example, a woman applying for a wedding loan at the same bank may get different loan terms.

 

Home loan vs personal loan: Things you need to know 

Collateral

A home loan is a kind of secured loan, like an education loan or car loan. Banks and lending companies may take a home owner’s house as collateral when it cannot be paid back on a mortgage or other debt.

Unlike a home loan, a personal loan has no security attached to it. As a result, there is no need for collateral when taking out a personal loan.

Sum involved 

There are a variety of loan amounts available, ranging from Rs 15 lakhs to Rs 8 crores. One’s ability to repay a loan will be determined by a variety of variables, such as income.

If you are looking for something more flexible, personal loans are available for amounts ranging from a few thousand rupees to as much as Rs 25 lakhs or Rs 3o lakhs. Personal loans up to Rs 60 lakhs are available from certain banking institutions.

Tenure

There are a variety of home loan terms available, ranging from five to 30 years. As a result of the larger purchase price of a house, loan terms are longer, which helps to keep EMIs lower. 

Personal loans, on the other hand, are available with terms ranging from 12 to 60 months.

EMI payments

Equated monthly installment (EMI) is the fixed monthly payments made by borrowers to lenders on a particular day every month for a predetermined length of time and the payments are pre-calculated. Due to the longer repayment term on a house loan, the EMI is lower than that of a personal loan for the same amount. Personal loans, on the other side, have a shorter repayment period, therefore the EMI is greater.

Time spent on processing 

The processing time for a home loan is three to four weeks. However, if the necessary papers are missing or the builder lacks the appropriate qualifications, the procedure may be further delayed.

E-banking has sped up the disbursement of a personal loan even more. A personal loan may be authorised immediately or within minutes, for new clients and delivered within 24 hours. 

Interest rates

As a home loan has a collateral (secured loan), the interest rate is lower than the interest rate on an unsecured loan. In India, the current house loan interest rates range from 6.9% to 8.5%.

As they are unsecured, personal loans have significantly higher interest rates, ranging anywhere from 9.6% to 22%, depending on the borrower’s specific profile. Low credit scores mean higher interest rates for borrowers, whereas good credit scores mean reduced rates of interest for borrowers.

See also: Home loan interest rates and EMI in top 15 banks

Tax benefits 

There are tax advantages connected with home loans that help the borrower to lower one’s income tax obligation and thus, may be returned as per schedule by enjoying all the tax benefits as you pay back your principal and interest, respectively, up to Rs 1.5 lakhs per year. 

If you choose to prepay a personal loan in whole or in part, it will have no impact on your tax planning, since personal loans do not have tax advantages.

See also: All about home loan tax benefits

 

Home loan vs personal loan in a nutshell

Basis of distinction Home loan Personal loan
Type of loan Secured Unsecured
Interest rates  6.65%-9.90 % 8.95%-21.30%
Amount disbursed  Rs 15 lakhs – Rs 10 crores Few thousands to Rs 60 lakhs
Tenure  5-35 years 12 to 60 months
Processing time  3-4 weeks Instant
Benefits Taxable Not taxable*

* You can claim tax deductions on personal loans in the following scenarios:

  • If the loan is taken for expanding your business and investment for boosting revenue.
  • Tax deduction for a personal loan utilised for home renovations (Section 24(b) of the Income Tax Act of 1961).
  • When you buy gold, jewellery, stocks and non-residential properties, such as land, plot, shop or factory.

As we have seen, home loan vs personal loan is used for quite different things. Your financial situation may be improved by fully understanding the terms of a loan before applying for one. If you are thinking about taking a loan, you should carefully consider your financial situation and ability to repay the loan, before deciding on an amount and payback term.

 

Still can’t make up your mind between home loan vs personal loan?

You can opt for a top-up home loan

Borrowing money is a big financial commitment. It is a loan that must be returned fully throughout the consumer’s selected repayment period. For new home purchases, it is preferable to get a home loan but if you need more money later, you can opt for a top-up home loan.

What is a top-up home loan?

Consumers having an ongoing relationship with the bank, excellent credit profile and the capacity to repay the loan, may apply for the top-up loan. Personal loans are handled the same way and may be used for everything from home furnishings to financing children’s education, to covering other unexpected expenditures. 

Banks will top-up the current home with a loan for up to 70% of the property’s value. If you make on-time payments on your home loan, you may be eligible for a significant loan increase. It is noteworthy to know that the loan may be utilised to settle personal financial responsibilities or to pay off another debt. As a result, you will not have to tell your new lender how you intend to spend the additional funds.

Getting a second mortgage is simple and just requires a little paperwork. The loan does not have any fees associated with early repayment or foreclosure. Based on the current value of your house, you may be able to get a higher-value top-up loan than the initial home loan provided.

 

 FAQs

Will my CIBIL score have an effect on the amount of money I may borrow for a home purchase?

It is important to note that your ability to get a house loan is directly tied to your CIBIL score, which is a snapshot of your complete credit history and track record of loan repayment. CIBIL keeps track of and collects information on credit card and loan payments made by individuals and businesses.

Do I get tax benefits on home loan?

Yes, according to the Income Tax Act of 1961, you are entitled to tax advantages on both, the principal and interest portions, of your home loan. For this reason, you must speak to a lending consultant about the tax advantages you may be eligible for on your loan.

What is the difference between a top-up home loan and a personal loan?

A top-up loan, which is a new loan on top of an existing one, is a financing option for items like a house loan or a personal loan. Even though top-up loan interest rates are typically 1.5%-2% higher than house loan interest rates, they are still lower than interest rates on other types of loans, such as personal loans.

 

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