The availability of various loans have made our life easier and more convenient. You can borrow these loans and use them to fulfil all your financial requirements without any hassles. You can also apply for a loan to meet your various dreams, such as buying a house, buying a car, financing a big fat wedding, or planning a dream vacation with your loved ones.
A few common types of loans available in the Indian financial market include home loans, car loans, business loans, and personal loans. A home loan can be considered the most helpful and readily available loan. A home loan can help you purchase your dream house without paying the huge upfront cost from your pocket. You can simply borrow a home loan and repay the amount in Equated Monthly Instalments (EMIs).
Several banks and non-banking financial corporations (NBFCs) in India provide home loans to their customers. If you wish to purchase a ready-to-move-in apartment or an under-construction housing property, you can avail of a home loan and fulfil your dream of house ownership. You can also apply for a home loan if you wish to purchase a plot and build your house over it or if you want to renovate your existing house.
That being said, many borrowers often get confused between a home loan and a home construction loan. Although these two loans sound similar, there are quite a few differences between them, and you must choose the right type of loan as per your requirement.
To help you out, we have listed the differences between a home loan and a home construction loan in this article. Continue reading to know further.
Let's begin with the definitions of the two types of loans.
What is a home loan?
As mentioned, a home loan is a loan that can be borrowed specifically for buying or renovating a house. It is essentially an agreement between the lender and the borrower wherein the lender provides a certain sum of money to the borrower to purchase or construct a housing property and the borrower agrees to repay the loan amount along with the interest over a certain period.
You can borrow a home loan to purchase a ready-to-move-in flat or apartment or under-construction housing property. When you take a home loan to buy an under-construction property, you can repay your loan amount as per the builder’s construction schedule and possession timelines. You can also avail of a home loan to purchase a piece of land and construct your house.
What is a home construction loan?
If you have a plot or a piece of land and want to construct a house over it, you can avail of a home construction loan. Lenders specifically provide this loan to help the borrowers meet the cost of building a new house. You can avail of a home construction loan to construct your house on a new piece of land or construct a new house within your existing housing property.
You can use a home construction loan to construct a bungalow, villa, flat, apartment, or even a multi-storeyed building. Unlike home loans, a home construction loan can only be used to build a new house and not purchase a house or plot. These loans are disbursed based on the construction period, and lenders usually assess the construction from time to time to ensure that the funds are used for appropriate purposes only.
Home Loans Vs. Home Construction Loans
Now that you know the definitions of both home loans and home construction loans, it’s time to dive deeper to understand their differences. Below are the differences between the two types of loans based on various parameters.
The loan application process is the first point of difference between a home loan and a home construction loan.
When it comes to a regular home loan, you can simply apply for it offline or online. The home loan application process is straightforward. You just need to visit the lender’s website or physical office and fill up a home loan application form. The lender will verify the property and directly transfer the home loan amount to the builder or seller.
However, if you wish to apply for a home construction loan, the process is a bit complex. You need first to understand whether a lender is offering a home construction loan or not, and if yes, then what are its eligibility criteria. Home constructions loans are generally not provided online since they involve heavy documentation and paperwork.
The second difference between a home loan and a home construction loan is their eligibility criteria and documentation process.
Lenders usually offer home loans with simple eligibility criteria and minimal documentation. The only thing you need to do is meet some basic requirements such as age, monthly income, credit score, etc., and submit a few simple documents such as your PAN card, Aadhar card, and bank statements. You can avail of a home loan even if you belong to the Economically Weaker Section (EWS).
On the other hand, the eligibility criteria and documentation for home construction loans are rigid and lengthy. You can avail of a home construction loan only if you have a plot or a housing property and want to construct a new house.
The documents required for a home construction loan include the legal authorization documents from the Municipal Corporation, construction design from an architect or civil engineer, a blueprint of your construction, and the tax submission documents, among others.
The third difference between a home loan and a home construction loan is the interest rates levied on them by lenders.
The first thing that you need to note is that not all lenders provide home construction loans. And a few of them that do usually charge a higher interest rate. The interest rates levied on home construction loans typically range between 10 and 14 per cent per annum.
On the other hand, home loan interest rates are very affordable and competitive. Almost all banks and NBFCs offer home loans in India. Another reason is the Pradhan Mantri Awas Yojana (PMAY) scheme of the Government, making home loans very affordable. Home loan interest rates can range between 6 and 10 per cent per annum.
The fourth and last point of difference between these two types of loans is their loan tenures. Typically, home loans are high-value loans since they are meant to purchase housing properties. That is why home loans come with a long tenure of up to 30 years.
On the other hand, home construction loans are provided for a shorter term than home loans. The tenures for home construction loans usually range between 7 and 15 years.
After knowing the differences between a home loan and a construction loan, you must be able to make an informed decision and choose the right type of loan for your requirement. While applying for any loan, make sure that you compare various lenders and their products to select the best option for yourself.
We at Poonawalla Fincorp make it easy for you to meet all your financial requirements through our range of loans, including home loans, personal loans, and business loans. Visit our website or branch office to know more.
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