Loans become essential when you need funds and your savings are not sufficient to meet your financial liabilities. When it comes to loans, there are a variety of loan options to choose from. Some are usage specific loans like home loans, car loans, education loans, etc. while some are multipurpose ones like personal loans, gold loans, loans against property, etc. However, many borrowers confuse different loans to be similar to each other. A loan against property and a home loan are often confused to be similar. However, they are very different from one another. Let’s understand how –
Basic differences between loan against property and home loan
- Purpose of the loan
A loan against property is offered for meeting any personal or business related financial need. You can use the loan for meeting medical emergencies, paying for education costs, taking a trip or for any other reason.
A home loan, on the other hand, is specifically allowed to buy a home, construct a home or to buy a plot of land for constructing a home. Moreover, you can also avail a home loan for making improvements, alterations or extensions to your home.
Thus, while loan against property has multiple uses a home loan has a specific use.
- Amount of loan
A loan against property is offered against the value of the property that you mortgage for the loan. The lender does an independent valuation of the property being mortgaged and then offers a part of the value as loan.
In a home loan, the loan amount depends on the value of the property which is being bought. Up to 80% to 90% of the property’s value can be funded through a home loan.
The property which you already own is pledged to the lender as collateral security for the loan in a loan against property. In a home loan, however, the property which you still don’t own is pledged as security.
- Mode of loan disbursement
Loan against property is usually disbursed in one lump sum. In case of home loans, if the loan is taken for under-construction properties, lenders usually disburse the loan in tranches.
- Repayment of the loan
In a loan against property, loan repayment begins immediately after the loan is sanctioned. In a home loan, however, in case of under construction properties, only interest on the loan disbursed is payable when the house is under construction. When you take possession of the home then EMIs include the principal component of the loan.
- Tax benefits
Home loans allow tax benefits. The principal repaid is allowed as a tax-free deduction up to INR 1.5 lakhs under Section 80C of the Income Tax Act. Moreover, the interest payments are also allowed as a tax-free expense under Section 24. In a loan against property, however, no tax benefit is allowed.
So, home loans and loans against property are different from one another. They are similar in the context of higher amounts of loan allowed, lower interest rates and being secured loans in nature. In other aspects they are different and you should know these differences when you avail either loan.
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