Soliciting loans from banks or other financial service providers has become an increasingly attractive method of financing personal ventures and purchases among India’s growing working population. They can serve as an effective means of funding ventures that cannot be fulfilled by an individual’s income alone at one time. In general, these types of loans can fall into three categories- home loans, personal loans, and automobile loans. Here, we will primarily be focusing on personal and home loans. The growth of these two loan services in recent years has also outpaced that of most other forms of financing.
Personal loans, on the other hand, may be solicited for purposes such as travel, higher education, home renovations, purchases or as an added cash reserve in financial emergencies. The main point of difference between home loans and personal loans is that personal loans are generally unsecured while home loans make use of the property being purchased as collateral. In addition to this, here are some other aspects in which a comparison of personal loans vs home loans can be drawn:
1. Loan Amount:
- Personal loans are generally smaller sums in the region of Rs. 50,000 to Rs. 25-40 lakhs, as they are generally solicited by individuals for a short term injection of funds. The loan amount that an individual would be eligible for is determined based upon their existing and prospective sources of income as well as their prior borrowing history through their credit scores. There are few service providers offering the upper limit of Rs. 40 lakhs and these amounts would likely only be lent to individuals with high incomes and exceptional repayment history in rare cases.
- Home loans are generally larger sums, often ranging between Rs. 5lakhs – Rs. 10 Crs although some lenders may offer them in the Rs. 1-2 lakh range. The loan amount, while also influenced by the borrower’s repayment history and income, depends more upon the cost of the property being purchased and is usually either a fixed portion of up to 80% of its overall cost. This is a crucial point in the difference between home loans and personal loans.
2. Interest Rates:
- Personal loans generally demand higher interest rates in the region of 11%-25% per annum in most cases. This is primarily a consequence of the lack of collateral involved which makes them a higher risk investment on the part of the lender.
- Home loans most often come with interest rates ranging from 8%-12% per annum due to their longer tenures and more securitized structure. Government initiatives such as the Pradhan Mantri Awas Yojana may also allow those belonging to the E.W.S., L.I.G. and M.I.G. sections of the population with incomes less than Rs. 18 lakhs per year to solicit home loans of up to Rs.12 lakhs with subsidies on interest rates ranging between 3% -6.5%. Hence the comparisons between home loan vs personal loan interest rates would give home loans a clear edge.
3. Loan Tenure:
- Personal loans have fixed-term ranges from 12 – 60 months (1-5 years), with some organizations allowing shorter terms of up to 6 months. Terms longer than this range are very rare. Since they are smaller, unsecured sums with higher interest rates lenders expect their customers to repay them over a shorter duration due to the higher risk they pose.
- Home loans are commonly issued for tenures ranging from 1-30 years. The lower limit of the tenure may not be ideal for most borrowers as these types of loans are larger sums that may take more time to be paid off. This is one of the major factors weighing home loan vs personal loan interest rates.
- Personal loans are generally unsecured loans and hence there is no collateral involved in these types of transactions.
- Home loans are secured loans where the property itself acts as collateral and can be seized for auction by the lender in case the borrower defaults on payments. This is the main difference between home loans and personal loans.
5. Loan EMI – Equated Monthly Installment:
- Personal loans generally have higher equated monthly installments for similar principal amounts as their tenures generally do not exceed 5 years, requiring the borrower to make more substantial payments over a relatively shorter period of time to repay the loan.
- Home loans have relatively lower EMIs as the payments are spread out over a longer period of time, even in cases with large principal amounts. This may be an important point of consideration for those comparing personal loans vs home loans when purchasing a property.
6. Tax Benefits:
- There are no tax benefits on personal loans except in cases involving the purchase, construction or renovation of property under Section 24 of the Income Tax Act, or certain business purchases of assets other than property.
- Payments on home loans are tax-deductible under Sections 80C, 24 and 80EE of the Income Tax Act. The maximum deducted amount on principal repayment and interest for these types of loans is Rs. 3.5 lakhs.This is another important point to consider when evaluating home loan vs personal loan interest rates.
It is essential to understand the various benefits and drawbacks of both types of loans before settling upon the ideal one for your requirements. This can only be achieved by a thorough comparison of personal loans vs home loans from a wide variety of financial service providers As an example of a strong contender, the personal loans from Bajaj Allianz available on the Finserv MARKETS portal are always a safe bet due to their easy online application process, rapid disbursal of funds and flexible repayment plans offering loans of up to Rs. 25 lakhs.
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