What is the Primary Difference Between Collateral-Based and Collateral-Free Loans?

As a secured or collateral-based loan, a loan against property offers funds at a low rate of interest. The loan is sanctioned against a residential or commercial property. The lender remains the legal holder of the property until you repay the principal and interest in full. In contrast, a personal loan is an unsecured or collateral-free loan, which means there is no need to pledge any asset. Collateral-free loans are approved based on the borrower’s income and credit profile. Since it is an unsecured loan, the interest rate is usually much higher than loan against property interest rates.

The Top-5 Reasons Why Loan Against Property is More Popular Than Collateral-Free Loans

The following are the reasons why a loan against property is more popular than a collateral-free loan.

  1. High Loan Amount

Unlike a collateral-free loan like a personal loan, which depends on the borrower’s income, lenders calculate the eligibility of a loan against property based on the property valuation. You can generally apply for a loan amount of up to 60% of your property’s market value. Hence, if your property is worth INR 1 crore, you can conveniently apply for a loan amount of INR 60 lakh.

  1. Low-Interest Rate

Lenders usually consider collateral-based loans as less risky when compared to collateral-free loans. Hence, you can expect a much lower interest rate from a loan against the property than a personal loan. As the EMIs depend on the interest rate, any reduction in the interest rates also brings down the EMIs.

  1. Extended Repayment Term

Besides the interest rate, most borrowers also prefer a loan against the property because of the extended loan term it offers. While you need to repay the principal and interest of a collateral-free loan before five years, a loan against property comes with an extended loan term of up to twenty years. Hence, the extra time you get with a loan against property can help you repay the EMIs conveniently.

  1. Tax Benefits

Unlike collateral-free loans, you can claim tax deductions for repaying the interest component of a loan against property. Under Section 37(1) of the Income Tax Act, you can claim a tax deduction on loan interest, if you use the funds for business purposes. Hence, besides attractive interest rates, you can also use a loan against property as a tax-saving instrument.

  1. Relaxed Eligibility Criteria

As a collateral-free loan depends on the borrower’s financial profile, you need to have a credit score above 750 to be eligible for the loan. Although some lenders entertain personal loan applications from borrowers with a credit score below 750, the interest rate can cause a deep dent in your finances. In contrast, a loan against property can be availed by anyone, irrespective of their credit score. The credit score does not make much of a difference in the case of loan against property interest rates.

Conclusion

A loan against property can provide you with more funds, extended loan term, and better interest rates than a collateral-free loan. However, a collateral-free loan takes less processing time than a loan against property. Hence, let your needs govern your choice, and you can select the best loan for you.

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