Loan against property: How does it work and how is it different from home loan?

Choosing the right type of loan to meet your financial needs could be a tough task considering the wide range of loans offered by banks and non-banking financial companies (NBFCs). This is especially true when options appear to be similar at first glance. Home Loans and Loans Against Property (LAP) often create confusion among borrowers due to their overlapping features. Though they may seem similar, key differences set them apart.

Let's delve into these, so that you can make the right choice according to your financial objectives.

Home loans

A home loan is a financial instrument that helps individuals purchase or build a new property. You could be eyeing a ready-to-move property, or even a plot for future construction. The purchased property acts as security for the loan. While you pay your instalments or EMIs, the lender gets the control of the ownership. Once all EMIs are paid, the property is all yours. You can expect to borrow up to 90 percent of the property's value, with interest rates starting at 8 to 8.5 percent per annum.

Loans against property

On the flip side, a loan against property lets you utilise your current property. It's also a secured loan, but here, your existing property acts as collateral. The loan amount is based on a proportion of your property's value, generally between 60-75 percent. Whether you're facing a personal emergency or eyeing business expansion, a LAP is your financial safety net. Interest rates for these loans usually fall between 9 per cent and 14 per cent.

Home loan vs loan against property

Home loans and loans against property both require property as collateral and come with a processing fee, often up to 7 per cent of the loan amount. However, they differ in purpose, interest rates, and loan-to-value ratios.

A home loan helps you buy or build a new property. The lender keeps ownership until you've repaid your loan in full. In contrast, a LAP lets you mortgage your current property to secure funds for a variety of needs.

Home loans generally offer lower interest rates starting from 8 per cent per annum and allow you to borrow up to 90 per cent of your property's value. In contrast, loans against property come with higher interest rates (between 9 per cent and 14 per cent) and allow you to borrow between 60-75 per cent of your property's value.