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Home Finance

Home Loan or Personal Loan – Which Should You Choose?

Housing and personal loans are flexible financial instruments that any Indian citizen with an excellent repayment capability can avail.

India CSR by India CSR
February 15, 2021
in Finance
Reading Time: 3 mins read
India CSR
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NEW DELHI (India CSR): Home loan and personal loan are the two most popular loan options in India. Although both loans provide you with funds, the usage and terms are poles apart. Here is a quick guide to the difference between a home loan and personal loan and how you can choose the best loan for your needs.

What is a Home Loan?

Home or housing loan is a secured loan which gives you funds for house construction or purchase, home renovation or improvement, or land purchase. Home loan interest rate is usually the lowest of all loans. However, as it is a secured loan, the lender may liquidate the property after serving notice if the borrower stops the loan repayment.

***

What is a Personal Loan?

Unlikehousing loans, personal loans are unsecured, and you do not need to pledge any asset to avail the loan. However, as personal loan repayments are riskier than a housing loan, lenders often charge a higher interest rate than a home loan. Although there is no risk of property liquidation, defaulting on personal loan repayments may have a devastating effect on a borrower’s credit score.

***

Home Loan or Personal Loan – Which One Should You Choose?

To pick the right loan, you need to know the differences between the two. Here are the three primary differences between a home loan and personal loan.

***

End-Use

A housing loan’sprimary purpose is to make house purchase or home renovation easier and more cost-effective. You can also use the loan amount to buy land. In contrast, there is no limitation to the end-use of personal loan funds. Borrowers use it to meet short-term financial emergencies or purchase anything they want. Usually, the amount you can get from a housing loanis much larger than a personal loan.

Hence, you can apply for a home loan when you need a larger amount and personal loan when the requirement is less.

***

Tax Benefits

Unlike personal loans, a housing loan can help you save up to INR 3.5 lakh on taxes. The Indian Income Tax laws do not have any provision for tax deductions on personal loan. However, Section 80C of the Income Tax Act allows you to claim a tax deduction of up to INR 1.5 lakh every financial year for repaying the principal component of a housing loan. You can also save up to INR 2 lakh for repaying the interest. 

Hence, if you are a taxpayer and want to reduce your net tax liability, choosing a home loan with an attractive home loan interest rate will be a better option.

***

Eligibility

The eligibility of a housing loan is slightly more complicated than a personal loan. The maximum term of a housing loan is thirty years, and hence, it is a long-term liability. In contrast, personal loans generally come with a maximum term of five years. As housing loan requires more commitment from the borrower, lenders verify the borrower’s income source and stability. On the other hand, personal loans require nothing more than a high credit score and decent monthly income.

Hence, if you are worried about your eligibility or have a history of bad credit, opting for a personal loan will be prudent.

Housing and personal loans are flexible financial instruments that any Indian citizen with an excellent repayment capability can avail.  However, the nature and purpose of the two loans are entirely different. As an informed borrower, you need to analyse your requirement, read the terms, and apply for the most appropriate loan option.

(India CSR)

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India CSR is the largest media on CSR and sustainability offering diverse content across multisectoral issues on business responsibility. It covers Sustainable Development, Corporate Social Responsibility (CSR), Sustainability, and related issues in India. Founded in 2009, the organisation aspires to become a globally admired media that offers valuable information to its readers through responsible reporting.

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