Which one should you choose? Home loan vs personal loan

Which one should you choose? Home loan vs personal loan

Loans become a part of one's financial affairs when one is not able to meet his/her aspirations with his/her current income or due to unforeseen emergencies like hospitalisation. Personal loans help in achieving small goals such as financing weddings, vacations and small expenses.

Loans help you make purchases, cover a short-term cash flow gap, or build a long-term asset like a home. Most of the financial institutions, including banks, non-banking finance companies (NBFCs) and housing finance companies (HFCs), offer a wide range of loans to meet the diverse needs of consumers.

Both home loan and personal loan are available to the customers depending on their specific needs. For the most part, borrowers look for 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 can be the perfect solution.

Things you need to know

Collateral loan

A home loan is a type of secured loan, such as an education loan or a car loan. The bank may also turn to the owner of the bank as collateral for the loan to be repaid after being tied up, when the loan will be repaid to repay the loan.

Unlike a home loan, no one is concerned with a personal loan. Collateral is required at personal time

 

Sum involved

There are different types of loan amounts available ranging from Rs 15 lakh to Rs 8 crore. The ability to repay the loan will be determined by a variety of variables, such as income.

If you are looking for something more flexible, there are personal loans available for amounts ranging from a few thousand rupees to 25 lakhs or 3o lakhs. Personal loans up to Rs 60 lakh are available from some 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 a fixed monthly payment made by the borrowers to the lenders for a predetermined period on a particular day every month and the payments are pre-calculated. Due to the longer repayment tenure of a home loan, the EMI is lower as compared to a personal loan of the same amount. On the other hand, personal loans have shorter repayment tenure, hence higher EMIs.

 

Time spent on processing

The processing time of home loan is three to four weeks. However, if the required documents are missing or the builder lacks suitable qualifications, the process may get delayed further.

E-banking has accelerated the disbursement of personal loans. A personal loan can be authorized for new customers instantly or within minutes and disbursed within 24 hours.

 

Interest rates

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

Since they are unsecured, personal loans have quite high interest rates, ranging anywhere from 9.6% to 22% depending on the specific profile of the borrower. A low credit score means higher interest rates for borrowers, while a good credit score means lower rates of interest for borrowers.

 

Tax benefits

There are tax benefits attached to a home loan which helps the borrower to reduce one's income tax liability and thus, can be refunded as per schedule while enjoying all the tax benefits, as you pay your principal and interest. Respectively, up to Rs.1.5 lakh Year.

If you choose to prepay the personal loan in full or in part, it will have no impact on your tax planning,

 FAQs

 

1. Which is the best bank to borrow from?

State Bank Of India

2. Can I make my friend a co-borrower?

Banks do not allow co-borrowing between friends. It is only through online channels or cheque that scheduled banks allow you to repay your loan. However, there are many instances where banks have recovered dues in cash.

3. Do my age and profession matter?

Your age and your income are the primary criteria for the bank to determine your creditworthiness.

4. Can I transfer the loan multiple times?

You can change your lender multiple times, if it helps you in reducing your debt burden. However, shifting too much is not advisable as it gives a false impression. Also, the fact that banks charge free on loan transfers should also be taken into account.

5. Will I have to pay penalty on prepayment of loan?

A borrower does not have to pay a penalty on prepayment after the Reserve Bank of India in 2013 directed financial institutions to waive off charges for loans taken at floating interest rates. However, if you have taken a home loan at a fixed rate of interest, banks levy a penalty on the transfer.

6. Do I get tax benefits on home loan?

Yes, as per the Income Tax Act of 1961, you are entitled to tax benefits on both the principal and interest of your home loan. For this reason, you should talk to a lending advisor about the tax benefits you may be eligible for on your loan.