Buying a home or funding a big-ticket expense is a major decision and often a financial one. In India, loans are a common way to fulfil such goals. But which one is right for you: a home loan or a Loan Against Property? In this blog, we’ll help you break down the key differences between a home loan and a Loan Against Property, so that you can make the right financial choice. Read on!
What is a Home Loan
A home loan is a secured loan offered by financial institutions to help you purchase, construct, or renovate a residential property. It’s one of the most common financial products in India, especially among first-time homebuyers.
When you take a home loan, the property you intend to buy serves as collateral until the loan is fully repaid. The loan typically covers 75% to 90% of the property’s value, depending on your eligibility and the lender’s terms.
What is a Loan Against Property
A Loan Against Property (LAP) is also a secured loan, but here, you pledge your existing residential, commercial, or industrial property to get funds. The loan amount is usually determined as a percentage (typically 60% to 75%) of the current market value of your property.
Key Differences: Home Loan vs Loan Against Property
|
Aspect |
Home Loan |
Loan Against Property |
|
Collateral |
The property you are buying or constructing is kept as collateral until full repayment. |
You pledge an already owned property – residential, commercial, or industrial – with a clear title and minimal encumbrance. |
|
Purpose |
Meant specifically for buying, constructing, or renovating a residential property. |
Offers flexibility in end use; you can use the funds for education, marriage, business expansion, medical needs, or personal emergencies. |
|
Loan Amount |
Usually, 75% to 90% of the property’s value, based on your eligibility and lender guidelines. |
Typically, 60% to 75% of the property’s current market value, depending on its condition and location. |
|
Processing Time |
Usually quicker to process, especially if buying from a builder with pre-approved projects. |
Takes slightly longer as the lender needs to verify ownership, legal status, and market value of the pledged property. |
|
Tax Benefits |
Eligible for tax deductions on principal (under Section 80C) and interest (under Section 24b) payments. |
Not eligible for tax benefits unless the loan is used for business purposes – only interest may be claimed as an expense in some cases. |
Real Life Examples of When to Take a Home Loan
Suppose you are a salaried professional in Pune planning to buy your first flat. You have saved enough for the down payment, but you need funds for the remaining amount. A home loan would be your best choice, offering low interest rates and tax benefits.
Similarly, if you are constructing a house on a plot you already own, a home loan specifically designed for construction would perfectly suit your needs.
Real Life Examples of When to Take a Loan Against Property
Imagine you run a small business and need ₹30 lakh to invest in new machinery. Instead of taking a high-interest loan, you mortgage your family’s commercial space and get a LAP with a flexible repayment tenure.
Or say you’re planning your child’s overseas education. You don’t want to dip into manual funds or break your fixed deposits. A LAP can give you the required amount while your investments continue to grow.
To Conclude
Understanding the difference between a home loan and a Loan Against Property is essential to make a smart financial choice. A home loan is ideal when you’re looking to buy or build a home and want long term and tax benefits. A Loan Against Property, on the other hand, is your go-to option when you need funds for non-housing needs and own property that can be mortgaged. Both options come with their own merits, and your choice should align with your goal, repayment capacity, and financial situation.
Frequently Asked Questions
Can I use a Loan Against Property to buy a house?
Technically, yes, but it’s not recommended. LAP doesn’t offer tax benefits, and it may have a shorter repayment period.
Is the interest rate for LAP fixed or floating?
Most lenders offer both options. You can choose based on your comfort with market fluctuations.
What kind of properties can I mortgage for LAP?
You can mortgage self-owned residential, commercial, or industrial properties with a clear title.
About the Author
We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Loan disbursal is at the sole discretion of Poonawalla Fincorp.
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