Though the financial literacy of the country has increased significantly over the years, there are still a few financial terms that people often misinterpret. It has been observed that most borrowers tend to get confused between a ‘Home Loan’ and a ‘Loan against Property’.
These two terms are even used interchangeably by many loan applicants. However, there is a lot of difference between these credit products.
A quick look at various aspects of these loan types will help you drive away the confusion and have a better understanding of both home loans and loans against property.
Purpose of the loan
- Home loans provide funds to borrowers for purchasing a house, plot, under-construction property, etc.
- On the other hand, a loan against property is a secured loan that helps borrowers to meet their personal and business requirements by mortgaging their property.
- The loan amount availed through Loan against property can be used for various purposes, such as the expansion of business, covering wedding expenses, medical costs, funding children’s education, etc.
Interest Rate
The interest rate associated with a home loan is comparatively lower than that of a loan against property. This is because the chances of defaulting on the loan are higher in the case of a loan against property.
Loan-to-Value (LTV)
- Loan against property is granted a maximum of up to 60% of the property value, whereas home loans can be offered a maximum of up to 90% of the property value.
- Financial institutions usually visit the property site before sanctioning the home loan.
- Property valuation is also performed in case of a loan against property.
Tax Benefits
For home loans
- Under Section 80C of the Income Tax Act, you can claim an exemption of up to Rs.1.5 lakhs every financial year on the principal repayment of your home loan.
- Under Section 24 of the Income Tax Act, you can also claim an exemption of up to Rs.2 lakhs on the interest payment.
For Loan against property
The tax benefits depend upon the usage of the funds availed through a loan against property
- If you use the funds to buy a property then you can claim home loan tax exemptions on the same.
- If you use the funds for business requirements, then under Section 37(1) of the Income Tax Act, you can claim tax benefits on the interest repayment and other incidental costs like processing fees.
- If you use the funds for personal reasons, you would not be eligible for any kind of tax exemption.
Conclusion
You should avail of a home loan if you are looking forward to buying a property. Whereas, if you are in need of immediate funds, you should go ahead with a loan against property.
Make sure you check all the important aspects such as interest rates, processing fees, prepayment charges, and repayment options while availing of any of these loans.
Irrespective of what type of loan you avail, it is always recommended to read the terms and conditions of the loan agreement carefully before signing the loan agreement. This will help you avoid any inconvenience in the later stage.
