In India, most people prefer applying for a loan to get funds during an emergency. While many banks and non-banking financial companies in India offer a variety of loans for different purposes, some people tend to get confused with two loan concepts that may sound similar but are entirely different.
Most people in India tend to get confused between home loan and loan against property or LAP. They tend to use the terms ‘home loan’ and ‘loan against property’ interchangeably. However, the truth is that home loan and loan against property are entirely different loan products and serve specific purposes to the borrowers.
If you are a first-time home loan or loan against property borrower, it would help to understand the difference between the two so that you apply for the loan type to suit your needs.
What is a home loan?
A home loan is a type of credit that you can avail from a bank, an NBFC or any other lender of your choice to purchase a new home, construct your home on the piece of land you own or buy a resale property.
What is a loan against property?
A loan against property or LAP is a type of secured loan wherein you mortgage a property with the lender against the amount you borrow. The lenders usually decide the maximum amount you can borrow based on their assessment of the property’s value.
Now that you know what home loan and loan against property is, let us understand the difference between the two.
- Interest rate
One of the most striking points of difference between home loan and loan on property is the interest rate. You can avail a home loan at a much lower interest than LAP. This is mainly because many lenders offer home loans at competitive interest rates. Also, you can take advantage of the various government initiatives like the PMAY CLSS and get a subsidy on the home loan interest rate.
The interest rate for LAP is generally higher than the home loan interest rate. The lenders usually determine the interest rate based on the borrower’s financial profile, the type of property mortgaged, the value of the property, etc.
- End usage of the loan amount
When you apply for a home loan, you must use the amount borrowed only for buying or construction of a home. You may even use it for home renovation or home extension.
On the other hand, when you apply for a LAP, the lenders do not have any limitation or restriction on the end usage of the amount. You can use the money for any personal or business purpose you want.
You can use the amount you borrow for business expansion, for paying child’s marriage, education, taking a world trip with your spouse, buying a new vehicle, etc. In a nutshell, you have greater flexibility with the LAP on the end usage of the loan amount.
- LTV or Loan to value ratio
This is another vital factor that distinguishes home loan and loan against property. When you apply for a home loan, they usually approve up to 80% of the property’s value as a loan. However, with LAP, the maximum amount you can get is up to 50% of the property’s value you mortgage.
Now that you are aware of the difference between home loan and LAP, apply for the loan type to suit your specific needs.