When hard-pressed for funds, you’ll either liquidate your assets or borrow. Disposing of is an emotional decision, as you have accumulated your assets over years of toil. Mortgaging assets for a loan is a more practical option, helping you raise funds to tide over the financial crunch. Plus, you get to retain your assets once the loan is paid in full within the specified timeframe.
Loan Against Property (LAP) and Loan Against Gold (LAG) are the two popular options to fund any urgent requirements. They are understandable terms with a lot of overlap, represent easy loaning, and are asset-backed. Both aren’t earmarked for a specific purpose. Both come with a similar set of risks. Despite the commonalities, LAP and LAG are two different loaning options. Both have particular unique quirks that make them valuable borrowing options.
Already finding it hard choosing the best option of the two? Read on, as we pit the two against each other on a few key parameters to keep you informed. But before that, let’s define them.
Loan Against Property Defined:
It’s all in the name. The Loan against Property involves you pledging a self-owned property as collateral for a specified loan amount. The collateral can be anything, land, house, or any other residential or commercial premises in your name. Its ownership stays with the lender until the loan is repaid in full, including the principal, interest, and additional applicable charges.
However, you can use the property as usual for the entire loan term. In the event of a default, the lender can liquidate the pledged property to recover the amount. The overall cost of borrowing is perhaps the lowest, second only to a home loan. Feel free to use Fullerton India’s loan against property calculator to determine LAP eligibility, interest rates, EMIs, tenures, and other aspects.
Loan against Gold Defined:
Indians are obsessive about gold. Regardless of the social status, every Indian household has some amount of gold in some form. When this gold is pledged for a loan, it’s called Loan against Gold. Gold jewelry, gold bars, and gold bank coins, everything is eligible for pledging if specific purity requirements are met. The pledged gold stays in the lender’s custody and returned once the repayments are complete, including principal, interest, and other applicable charges.
Upon loan default, you lose the pledged gold. It’ll be out on the market to recover dues. The LAG represents easy loaning, with no credit checks, minimal paperwork, quick processing, and secure renewals. The overall cost of borrowing is competitive, usually lower than that of personal loans. The Loan To Value (LTV) is low, typically 60% of the pledged gold’s total market value.
A brief comparison:
Let’s compare Loan against Property and Loan against Gold to help you to educated decisions.
a). Cost of borrowing:
The cost of borrowing is the prime decision factor when borrowing. The top contributor to the cost of borrowing has to be interest rates, followed by the processing fee. Even a seemingly negligible variance in interest rates may add up to a massive difference in your overall cost of borrowing. On this parameter, Loan Against Property has the edge over Loan Against Gold.
The interest rates are lender-specific, meaning they vary from lender to lender. But you’ll be paying upwards of 8.70% as interest rates in a LAP, while the same for LAG starts from 9.15%. Since interest rates are compounded annually, you’ll save a fortune in the long term with LAP. Just use a loan against the property calculator to know your interest rates and the cost of borrowing.
Tenor refers to the timeframe for loan repayments. Tenors can impact your loaning experience, big time. Shorter tenors mean higher EMIs, which can strain your monthly budget. Conversely, longer tenors take the burden from EMIs but reduce interest outgo significantly.
LAP is a long term credit with tenors ranging from 12 months to 20 years. On the other hand, LAG is a short term credit, involving shorter tenors, ranging from 3 months to 12 months. LAP offers you the flexibility to opt for tenors suiting your repayment capacities. If you feel comfortable paying higher EMIs, choose for shorter tenors, and vice-versa.
c). Possession of the asset:
In a LAP, the lender keeps the pledged property’s papers. However, you can use the asset as usual during the loan term. Contrarily, the gold loan lender will possess your pledged gold and return it only when the repayment is done. It’s yet another advantage that LAP has over LAG.
d). Processing time and eligibility:
When you opt for LAG, expect faster processing time and easy eligibility. Typically, your loan is approved and disbursed within a day. That said, the loan against property eligibility is also simple, though processing and disbursals might take a couple of days.