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5 Basic Differences Between a Personal Loan & a Home Loan




What is a Home Loan?

A home loan has a precise purpose related to a house. It can be the purchase, renovation, or construction of a property. We all know that it is a significant expense to purchase a property. Everyone doesn’t have that kind of amount with them at once to spend.

Therefore, they take a home loan and pay the bank or the financial institution in Equated Monthly Instalment (EMI).

What is a Personal Loan?

A personal loan can be taken for various purposes. It can aid a cash crunch or help fulfil a goal where you need some money to be infused. The common reason why people take personal loans are travelling, marriage, higher education, medical, or any other kind of emergency. It is also paid via EMIs.

There is a vast difference between a personal loan and a home loan apart from the basic purpose. Let us explain the 5 fundamental aspects of the personal loan vs home loan in detail in upcoming sections:-

1. Loan Amount

A personal loan is taken to fulfil a minor requirement of cash. Say for a holiday, renovation, or an expensive phone. Thus the loan amount for a personal loan typically ranges from 50 thousand to 25 lakhs. The loan amount depends on the credit score of a person.

On the other hand, a home loan is taken for a significant amount that ranges from 5 lakhs to 10 crores. It depends more on the value of the property rather than the credit score. 80% of the value of the property can be taken as a loan by an individual.

2. Rate of Interest

Personal loans are known for their convenience but also higher interest rates. Its basic rate of interest ranges between 11-25%. A poor credit score or longer tenure can eventually raise the interest. One reason for its higher interest rate is that it is an unsecured loan.

Home loan interest rates are lesser than the interest rate for a personal loan. The usual rate is 8-12%. The tenure for the loan is of many years, and it’s a secured loan. So the interest rates are lesser than personal and many other loans.

3. Loan Repayment Tenure

Personal loans are provided for a short-term period. Its tenure ranges from 12-60 months. But generally, institutions prefer a short time period, for example, 6 months. One reason for giving personal loans for smaller tenure is that lenders don’t want to risk their principal sum by lending for a longer time.

In contrast, home loans are given for even 30 years of tenure. The amount is more in the home loan case, and the risk is minimal as the loan is secured through the mortgage. So institutes are generous in providing longer tenures for repayment of home loans.

4. EMI Amount

The amount of monthly instalment for the same amount can be more in a personal loan. The reason is that a personal loan is given for a limited time for a maximum of 5 years period.

In the case of the home loan, the EMIs are spread out for many years. Thus it becomes easy to minimise the EMI amount. Therefore it won’t be easy to purchase a property with a personal loan instead of a home loan.

5. Tax Rebate

Under section 24 of the income tax act, a certain type of buying, construction, and renovation through personal loans comes under tax rebate. Other than that, there is no tax relief for the repayment of a personal loan.

Home loan repayments fall under tax deduction through sections 80C, 24, and 80EE of the income tax act. Banks can charge up to a maximum amount of 3.5 lakhs as interest on a principal amount for a home loan.

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