Can You Use a Personal Loan for Down Payment of a Home Loan

A home loan in India typically requires a down payment of 10% to 20% of the property’s value. Since property value can run into tens of lakhs or a few crores, making the entire down payment with savings might not be feasible for some. In that case, getting a personal loan for the down payment becomes a viable option. In most cases, there are no restrictions on how you use a personal loan. Therefore, you have the flexibility to use it for needs like a down payment for a property.

When planning to pay a down payment with alternative financing solutions, you might want to know if you can get another loan along with a home loan.

A personal loan and a home loan are two different types of credit and serve different purposes. There are also no bars on how many loans you can take simultaneously. This lets you get a home loan and personal loan together. However, it is important to consider your financial stability and many other factors, like your credit score, your financial requirements, your income, your repayment plan, etc., before applying for multiple loans together.

There are some factors that can influence whether you get both loans together, including the following:

• Credit Score: Lenders access the credit score to check your credit history and creditworthiness. This gives them a rough idea of whether you can make timely repayment. A CIBIL score of 700 or above is generally considered good. A good score might increase your chances of securing a higher loan amount at an affordable interest rate.

• Debt-to-Income Ratio (DTI): DTI is a financial metric comparing monthly debt payments against income. An increased DTI percentage means that your debt payments are higher and take up most of your income. Lenders prefer borrowers with lower DTIs as they give them better repayment assurity.

Although it is possible to get both the credit products together, it requires careful financial planning. You should consider factors like Equated Monthly Instalment (EMI), your income, tenure, interest rates, etc., to plan everything before taking both loans simultaneously.

Once you have planned everything, here’s how to get a loan for the down payment:

• Assess your home loan and down payment requirements

• Check loan eligibility and lender limits

• Check your credit score

• Ensure your DTI is low

• Compare interest rates, repayment tenure, and other loan terms from different lenders

• Understand the impact of home loan eligibility

• Gather required documents

• Find the right lender and apply for the loans

While you can finance a down payment with a personal loan, there are some crucial factors you should consider:

• Increased Cost of the Property

Unsecured personal loans can have higher interest rates than secured loans, which can indirectly increase the total cost of the property. Suppose, you apply for a ₹10 Lakh loan for a home loan down payment at 15% interest over a three-year tenure. In this case, the interest you will pay over 3 years on your loan is ₹2,47,952. This will be the added cost that will go into buying the property.

• Personal Loan Sanction

As a down payment for a home can run into several lakhs, it is best to assess whether any lenders are willing to offer that amount. Several factors, like your CIBIL score, income, employment stability and type, etc., can impact whether you will get such a high unsecured personal loan.

• Impact on Credit Score

Your credit score is determined based on your credit repayment capacity. If you apply for a personal loan and repay it on time, your CIBIL score will increase. However, if you miss a repayment, your credit score can take a hit and impact your borrowing power in the future.

• Your Budget

Taking a personal loan along with a home loan can impact your DTI ratio. This can strain your budget financially and make it difficult to keep up with the payments.

A personal loan is quite versatile and can be used to make a down payment for a home loan. Its minimal documentation, quick disbursal, and flexible tenure make it an ideal option when your savings are falling short on a down payment. However, you should consider important factors like EMI, interest rates, credit score, and more to carefully plan your finances before taking a personal loan for down payment.