Home Loan vs Personal Loan: Which One Should You Opt for

Loans are often viewed as an option that helps a consumer in making a purchase by covering short-term cash or assisting in building/purchasing a long-term asset such as a home. Many financial institutions such as banks, non-banking finance companies referred to as NBFCs, along with Housing Finance Companies offer a range of loans to meet the various requirements of the consumer.

Today, soliciting loans from banks, online loan agents, or any other financial service provider is becoming an increasingly attractive method of financing personal as well as professional ventures along with making purchases among the growing working population. Loans serve as an effective means to fund ventures that cannot be built on an individual income alone.

In this home loan vs personal loan article, we will be primarily focusing on what differentiates the two.

A] What is a Home Loan?

Home loans are usually solicited when an individual is planning on making a new purchase or wants to renovate his/her home or wants to construct a new house on their property. A home loan is offered when the cost is more than what the individual can arrange.

By opting for a home loan for a certain percentage of the property cost, the individual can pay their creditors back in installments over a fixed duration of time while still living within their means.

With a home loan, the individual can borrow the money required to make a down payment and go ahead with the purchase without having to spend all their funds. Today, banks and other financial institutions offer a variety of home loans.

Also Read: The Whole Truth about Credit Scores for Home Loans

B] What is a Personal Loan?

Personal loans can be solicited for purposes including travel, higher education, purchase, and home renovation. They often act as an added cash reserve in case of emergencies. The main factor that differentiates a home loan from a personal loan is that – personal loans are usually unsecured whereas home loans take into consideration the property that will be purchased as collateral.

In a personal loan, the bank lends money to the individual based on their creditworthiness. A personal loan does not require any kind of collateral in exchange for the required loan amount.

Also Read: How Do You Get a Personal Loan Without Security?

C] Difference between a home loan and a personal loan: Things to know

Home loans and personal loans are both available to the consumer based on their specific needs. Many a time, borrowers seek out home loan services when they are ready to make a big purchase on their own. While on the other hand if they require a little amount of money for a down payment, a personal loan can be considered a perfect solution.

But what exactly is the difference between a home loan and a personal loan?

Both differ in terms of multiple collateral requirements, interest rate, amount, purpose, EMI, and processing time. There are also many other aspects based on which a comparison between personal loans and home loans can be drawn.

1. Collateral

• Personal loans are unsecured forms of loans that do not require any collateral in any of the transactions.
• A home loan is a type of secured loan where the property itself acts as collateral that can be seized for auction by the lender if the borrower defaults on the payment. This is the most critical difference that sets a home loan apart from a personal loan.

2. Sum involved

• Personal loans have smaller sums that range from ₹50,000 to ₹25-40 lakhs. Personal loans are generally solicited by individuals for a short injection of funds. The loan amount that an individual can be eligible for is often determined based on their existing prospective source of income along with the prior borrowing history of their credit scores. There are a few service providers who may offer the upper limit of ₹40 lakhs. However, this amount is likely to be lent to individuals with high incomes and exceptional repayment history.
• Home loans generally offer the largest sum ranging between ₹5 lakhs to ₹10 Crs. Some lenders often offer sums in the range of  ₹1-2 lakh. The loan amount is influenced based on the borrower’s repayment history as well as income. However, it depends more on the cost of the property that is being purchased.

3. Tenure

• Personal loans have a fixed term tenure that ranges from 12-60 months, i.e 1-5 years. Some financial institutes also offer a shorter term of up to 6 months. However, terms longer than this range are very rare. In personal loans, the lender expects the customers to repay them in a shorter duration due to their higher risk.
• Home loans can range from 1-30 years. The lower limit on the tenure of a home loan may not be ideal for most borrowers as these types of loans come with larger sums that may take more time to repay. Loan tenure is a major factor when weighing in between a home loan and a personal loan.

4. EMI payment

• Personal loans often have a higher EMI for a similar principal amount and the tenure for a personal loan does not often exceed five years. A personal loan requires the borrower to make more substantial payments over a short duration of time to repay the loan.
• In comparison, home loans have relatively lower EMIs. The payments are often spanned over a long time period, especially in case of a high principal amount. This is often considered a vital point to differentiate a home loan from a personal loan when purchasing a property.

5. Interest rates

• A personal loan usually has a higher interest rate that falls in the bracket of 11%-25% per annum. This is primarily a consequence that arises due to a lack of collateral involved, which makes a personal loan a higher-risk investment on the part of the lender.
• Home loans come with an interest rate that falls in the bracket of 8%-12% per annum due to their long tenure. The comparison between a home loan and a personal loan based on their interest rate often gives home loans a higher edge over the other.

Also Read: Key Difference Between Home Loan and Loan Against Property

Conclusion

We have seen that home loans and personal loans are taken for different purposes. However, before opting for any loan, it is vital to closely study and understand once finances and repayment capacity before deciding on the tenure as well as the loan amount. It is equally important to understand the benefits as well as the drawbacks both the loan types provide.

Before choosing one, a comparison of home loans vs personal loans can help in gaining clarity on the wide range of options available. It is equally important to understand the online application processes offered by different providers along with the rapid dispersal of funds and flexible repayment options offered for the loan.