One may often require a loan when faced with a financial shortfall. But a choice of a particular loan option can have a bearing on the future finances of any individual. A personal loan and a home loan are two popular options but with widely varying applications.
One can choose between a personal loan and a home loan based on several factors like the interest rates, the loan tenure, amount, security, and eligibility. Here are the top seven differences between the two.
1. Purpose of the Loan
The most apparent difference between a personal loan and a home loan is the purpose for which the two are considered. Usually, a personal loan is an unsecured form of a loan. This implies one can use it for any particular purpose, a medical emergency, education, marriage, or shopping, among others. Also, a personal loan need not necessarily be used for any particular purchase, unlike a home loan.
A home loan is taken for purchasing or constructing a house or a flat, or to renovate or furnish the same, depending on the specific terms and conditions of the lender. The lender may also ask for details pertaining to the property papers. So, here is the first difference between a personal loan and a home loan.
2. Secured Versus Unsecured Borrowing
A personal loan is usually given as an unsecured loan whereas a home loan is a secured loan.
An unsecured loan usually requires a higher interest rate since there is no security for the lender. The interest rate charged on a personal loan may also depend on the income of the applicant, his or her profile or credit standing with the bank, and other factors.
Meanwhile, a home loan is usually taken as a secured loan. This implies that the property for which the loan is taken is used as security for the loan. In case of a default of the loan payment for an extended period, the lender may take ownership of the property and sell it to recover the amount of the defaulted loan.
Due to the higher risk, a personal loan usually has a higher interest rate as compared to a home loan.
3. Interest Rates
The interest rates differ widely between a personal loan and a home loan. The interest rate on a home loan is usually lesser as compared to that of a personal loan. Personal loans have a higher risk attached to them and hence the interest rate charged on the former is higher than the latter.
The interest rate on a personal loan also depends on several factors like the credit score of an individual, his or her income, the profile of the applicant, the relation between the borrower and the lender, and the overall liabilities of an individual. Nevertheless, the interest rate charged on a personal loan is one of the highest.
Home loans, on the other hand, have a relatively lower rate of interest. However, due to a larger borrowed amount and higher tenure of the loan, the total amount of interest paid on a home loan can be significantly large. Individuals must compare the terms and conditions rather than going solely by the interest rate when choosing between the two.
4. Loan Amount
The loan amount that one can seek for also varies depending on the type of the loan. Usually, the loan amount that one can seek for a personal loan is comparatively lesser than that of a home loan. The maximum amount of a personal loan depends on the income, liabilities and credit standing of the borrower.
However, there is no specific maximum limit of a personal loan; it may vary from lender to lender. One can get a considerable amount of loan depending on the specific profile of the borrower. Nevertheless, a personal loan generally does not cover the cost of expensive assets.
When it comes to a home loan, one generally takes a large amount of loan since a property is generally the costliest asset that one can purchase. However, a home loan usually covers only a particular percentage of the total value of the property and the down payment is usually made by the borrower. In addition, the total amount due may also include other charges like the registration and maintenance charges, etc.
5. Repayment Tenure
The repayment tenure for a personal loan is also generally lesser than that of a home loan. The tenure of a personal loan usually ranges from a period of one to seven years depending on the lender. A home loan, on the other hand, has a significantly longer tenure as compared to a personal loan. This implies that the borrower has a longer time to repay the borrowed amount.
With a longer tenure, the borrower has the option to pay a lesser amount per month. However, the interest charged on a home loan over the period of the loan will be much larger as compared to that of a personal loan.
6. Approval and Documentation
The approval process for a personal loan is generally easier and straight forward as compared to that of a home loan. Usually, a personal loan can be sanctioned faster than a home loan since the approval process for the latter is more rigorous. In case of a personal loan, the borrower may be required to provide documents like a PAN card, address proof, salary slips, and other documents.
In case of a home loan, besides providing the personal documents, the borrower may also have to submit various documents related to the property, its legal status, its value, the progress of its construction, if any, its location, etc.
7. Eligibility and Credit Score
The eligibility criteria for a personal loan and a home loan differ widely from each other. Usually, a higher credit score and income are required in order to apply for a home loan as compared to a personal loan.
When it comes to a personal loan, a credit score plays a significant role in determining the approval status of an individual and their interest rate. Also, the profile, liabilities, and income of an individual play a significant role in determining the eligibility of an individual for a personal loan.
An individual’s credit score and outstanding liabilities also determine how much loan he or she can get. In case of a home loan, the value of the property also adds to the credit standing of the borrower. The terms and conditions of an individual for a home loan also depend on several factors like the down payment percentage, the profile of the borrower, etc.
Personal Loan Versus Home Loan: Which One Should You Choose?
One may choose between a personal loan and a home loan based on several factors like the interest rates, the loan tenure, amount, security, and eligibility. There are several differences between the two. A personal loan can help one finance a need that may not be associated with property. On the other hand, a home loan may be more suited to purchase a house or a flat.
While comparing a personal loan versus a home loan, one must choose the one that has a better scheme in terms of the interest rate, processing fees, amount, and the total cost of the loan, etc. One must also ensure that one does not exceed the repayment capacity while considering a loan.
