Personal Loan or Home Loan- Which is better?

What are Home Loans?

A home loan is a financial instrument that allows a person to buy or build a house with variable or fixed interest rates. During the term of the loan, the borrower is required to make monthly instalment payments to cover the principal amount borrowed plus interest. Since home loans are secured, the borrower must provide collateral. A borrower's home is frequently used as collateral for in-home loans, and in the event of default, the lender may take possession of and sell the property to recuperate the loan balance.

What are Personal Loans?

A personal loan is an unsecured loan that can be obtained from a bank or lender to cover a variety of needs such as travel, medical crises, home renovations, and shopping. It may be paid back in monthly instalments, including the lender's interest, and doesn't require collateral or security. Other debts might also be consolidated with personal loans. Although monthly instalment payments (EMIs) are an option for both loan types, there are some notable distinctions between them. These loans can be used to pay off existing debts or to purchase a home.

A Comparative Study of Home Loans and Personal Loans

1. Purpose- The primary difference is the purpose for which each loan is meant. As the name implies, home loans are intended only to cover the costs associated with buying a home or other real estate. Depending on the region and property value, these loans usually give bigger amounts, ranging from hundreds of thousands to millions. On the contrary, personal loans have a wider range of applications, including debt relief, unexpected medical costs, home upgrades, and emergency funding. Personal loans often have lesser loan amounts, with many caps reaching several lakhs.

2. Interest Rates- The interest rate is the proportion of the loan amount that a lender charges for borrowing funds. It is usually assessed over a certain length of time, such as a year, and is computed as a percentage of the main loan amount. Due to their unsecured nature—that is, the lack of collateral—personal loans often carry higher interest rates than house loans, which puts lenders at more risk. Conversely, house loans have lower interest rates since the acquired property serves as collateral, reducing the risk for the lender.

3. Term of Reimbursement- The repayment conditions of both loans are also drastically different. Home loans often have long payback durations ranging from 15 to 30 years, allowing borrowers to easily handle their monthly instalments. This longer period is required because of the significant loan amounts involved. In contrast, because personal loans are smaller in amount, they often have shorter payback terms—between 1 to 5 years. Compared to house loans, this requires larger monthly payments, which may affect the borrower's financial flow.

4. Taxation- Depending on the area and specifics of each case, home loans may provide significant tax advantages. Borrowers may be eligible for tax deductions on the interest paid on their home loan in certain areas. The total cost of the loan may be considerably lowered by taking these deductions. However, these tax benefits are usually not available with personal loans.

5. Prerequisites of application- The loan application process varies as well. Applications for home loans often require more thorough documentation and verification processes. To determine whether a borrower will be able to repay a big loan amount over an extended period, lenders carefully review the applicant's credit score, job history, and stability of income. On the other hand, because personal loans have smaller loan amounts and less risk for the lender, applications for them can be processed more quickly. Still, obtaining a personal loan with a favourable interest rate requires a high credit score.

CONCLUSION

Both home loans and personal loans serve valuable purposes in the financial landscape. However, the choice between a home loan and a personal loan hinges on the specific purpose of one's financial need and overall financial situation. If the goal is to purchase a house, a home loan becomes the logical choice, offering larger amounts, lower interest rates, and potentially even tax benefits. However, for smaller, non-reoccurring expenses, a personal loan might be a suitable option due to its quicker application process and shorter repayment terms.