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Difference between home loan & personal loan?

Personal loans are getting popular as the banks have become liberal in giving such. How is home loan different from personal loan? understanding when to tap personal loan is important. Differences in terms of collateral requirements, purpose, amount, interest, tenure, EMI, processing times are explained to choose.

Home Loan vs Personal Loan

Loans are important financial tools which can help you make purchases, address need for funds during an emergency or to create an asset like buying a home. Broadly loans are of three types- personal loans, home loans and automobile loans. However, each of these loans are of different types and have different features. Here, we take a look at the difference between a home loan and a personal loan.

What is the Purpose?

A home loan can be taken only to purchase a home. However, a personal loan can be taken for any purpose which could be to purchase something, for a daughter's marriage, start a business or even to go tide over a cash crunch.

Collateral

The most important difference between a personal loan and a home loan is the type of loan. A home loan is a secured loan. In case of a home loan, the home acts as a collateral and can be seized by the bank or lending company in case of a default in loan repayment. A personal loan, on the other hand, is an unsecured loan. Hence, in case of a personal loan, there is no collateral requirement.

Amount

Home loans are available in larger amounts starting from Rs 20 lakh and going up to Rs 7 crores. The amount of loan one is eligible for will depend on several factors, like their income, repayment capacity and so on. On the other hand, personal loans are available for Rs 50,000 going up to Rs 15 lakh, 20 lakh or 25 lakh. Some banks offer personal loans of Rs 50 lakh and above.

Interest

Since a home loan is a secured loan, interest on home loans are lower than that of personal loans. Currently home loan rates in India are in the range of 6.9- 8.5 per cent. Since they are unsecured loans, personal loans have a much higher rate of interest which range from as low as 9.6 per cent to 22 per cent depending on profile of the borrower. Those with a high credit score are eligible for loans at lower interest rates and vice-versa.

Tenure

Home loans tenures would range from 5 years to 30 years. Home loan tenures are higher because homes are big ticket purchases and longer tenures help to keep the EMI low. However, personal loans have a shorter tenure of 12 to 60 months.

EMI

EMI refers to Equated Monthly Installment. It is a pre-calculated fixed payment amount which a borrower pays to a lender at a specific date of each month for a specific period of time. Home loans have a lower EMI amount for a certain amount, compared to a personal loan because a borrower can pay back a home loan over a longer period. On the other hand, personal loans need to be paid over a much shorter tenure, hence the EMI is higher.

Processing Time

Home loans take about 3-4 weeks to be processed. However, in some cases there may be a further delay in the process if the required documents are not in place or if the builder does have the proper credentials.

The e-KYC process and the use of technology has brought down the time to disburse a personal loan even further. Personal loans can be approved instantly (for existing customers) or in a matter of few minutes (for new customers) and disbursed within 24-48 hours.

Conclusion

As we have seen that home loans and personal loans are taken for different purposes. It is important to understand the features of a loan before availing one as it helps to plan one's finances better. Before taking any loan, it important to take a close look at one's finances and repayment capacity and then decide on the amount and tenure of the loan.