Difference Between Home Loan and Personal Loan: Which is better?

Loans have become an integral part of our daily lives. They help us in affording the life we wish to have for ourselves. These days, banks and lenders offer different types of loans, including secured loans, such as Home Loans, and unsecured loans, such as personal loans. While borrowers’ avail of personal loans to handle small-term goals, they take Home Loans to facilitate the purchase of their dream home. Homes have become highly unaffordable these days and it is nearly impossible for most borrowers to buy a home without any external financial assistance. 

This article discusses in detail the difference between Home Loans and personal loans. So, read on.

What is a Home Loan?

A Home Loan is a secured loan that involves collateral. The interest rate on these loans is, therefore, quite low and lenders give borrowers the flexibility to pay these loans over a period extending up to 40 years. Further, Home Loans also come with certain tax benefits. These reasons have made Home Loans quite popular over the last few years and today, most home buyers take a Home Loan to fund the purchase of their home. One can avail of a Housing Loan to purchase a move-in home or an under-construction property. 

What is a Personal Loan?

A personal loan is an unsecured loan and does not involve collateral. Thus, in the case of personal loans, the risk involved for the lender in lending money is quite high. Lenders, therefore, charge a higher rate of interest on personal loans. Further, the tenor for personal loans is also quite short. In general, borrowers avail of a personal loan to meet their short-term financial goals when they know they will be able to pay off the loan within a few years.

Home Loan vs. Personal Loan: Which is Better?

To be able to answer this question, we must first look at the difference between these two financial products.

Loan Amount

Home Loan collateral is the same property against which the Home Loan has been taken. Since a Home Loan involves security, the risk for the lender in lending money is quite low. In case of payment default, the lender can sell the property for loan recovery. It is for this reason that lenders sanction hefty amounts under Home Loans. Borrowers can avail of loans up to Rs.5 Crore or higher, basis eligibility, under a Home Loan.

Personal loans, on the other hand, do not involve any collateral and therefore, are a risky affair for the lender. Lenders, therefore, do not ever sanction a very high loan amount under a personal loan. While some lenders offer personal loans up to Rs.60 Lakh, most lenders do not sanction loan amounts above Rs.25 Lakh under their personal loan offering.

People Also Read: Home Loan Disbursement & Sanctioning Process

Tenor

Since Home Loans involve a hefty sum, lenders allow borrowers to repay their loans over a period extending up to 40 years. A long tenor enhances Home Loan affordability and makes repaying a Home Loan easier and stress-free.

However, when it comes to personal loans, lenders expect borrowers to repay the loan within a short tenor. The repayment tenor for personal loans ranges between 1 to 5 years.

Interest Rate

The comparison is incomplete without the comparison of Home Loan vs personal loan interest rates. Home Loans are secured loans and therefore, lenders sanction these loans at low-interest rates. As a matter of fact, home loans are the cheapest loans. Currently,  home loan interest rates vary between 8.45%* and 15.00%*. Personal loans, on the other hand, draw high-interest rates. The interest rate on these loans varies between 11% and 24%. Thus, personal loans are always way more expensive than Home Loans.

Processing Time

Home Loans are big-ticket loans and therefore, lenders sanction these loans only after proper assessment. The loan processing time is therefore higher for Home Loans. In general, if you are applying for a home finance, expect to see funds in your account after two to three weeks of making an application.

Personal loans, on the other hand, involve small sums of money and therefore, are sanctioned quite easily and quickly. One can expect to have the personal loan amount disbursed into their loan account within 48 Hours* of making an application.

Also Read: Know About Home Loan Disbursement and Sanctioning Process 

End-Use Restriction

While Home Loans have many advantages, there is one thing that works in the favour of personal loans. Personal loans come with zero end-use restrictions. In other words, an individual can use the funds availed of under a personal loan to meet any kind of personal or professional requirements. One can use this money to pay off another loan, pay for a child's education or wedding, take a luxury trip abroad, etc. If you are paying your EMIs on time, your lender will not say anything about how you are spending the money.

Home Loans, on the other hand, come with end-use restrictions. One can use the money availed of under a Home Loan to buy a home. Thus, if you need money for any other purpose than to buy or build a home, a Home Loan won't come in handy. However, you can benefit from a top-up on your Home Loan as top-up loans come with no end-use restrictions.

The difference between home loans and personal loans discussed in this article clearly indicates that when it comes to affordability and ease of repayment, home loans are better than personal loans. However, the funds availed of under a Home Loan can only be used to buy a ready-to-move-in or an under-construction property. Thus, if you need money urgently to take care of a financial emergency, taking a personal loan would be your only choice.

If you are taking a personal loan, try and pay the loan as soon as possible as personal loans are sanctioned at very high-interest rates and therefore, the longer you wait to repay the loan amount, the higher will be your total interest outgo. In case you already have a Home Loan running, you can avail of a Top-up Loan. Top-up Loans are sanctioned at low-interest rates and come with zero end-use restrictions. Therefore, you can use the money to tackle any short-term or long-term financial goal as well as handle a financial emergency.

People Also Read: About Top Up Loans and How to Avail of Tax Benefits