Taking a loan is often necessary to meet large expenses or financial goals. Two popular loan options in India - Loan Against Property (LAP) and gold loan - allow you to leverage an existing asset to raise funds without immediately liquidating it.
However, they differ significantly in their features and suitability for various borrowing needs. This article will compare LAP and gold loans on key parameters to help you choose the better option for your specific situation.
What is a Loan Against Property (LAP)?
A loan against property or LAP is a secured loan where you pledge your residential or commercial property with a bank or financial institution as collateral to raise a loan. The lender can sell your property to recover the loan if you default on repayment. However, you can continue occupying or renting the property while repaying the LAP.
LAPs allow you to borrow large sums by putting up property worth higher value as security. The high value of the property also allows an increased loan-to-value ratio. For instance, you can get an LAP of up to 90% of your property's current market value with some loan providers. This makes it easier to meet large financial goals like business expansion, children's higher education, marriage expenses, etc.
What is a Gold Loan?
Under a gold loan, you pledge your gold as collateral with a bank or financial institution to borrow money. It allows meeting urgent needs without selling your gold. You continue holding the gold while paying EMIs. If you default, the lender auctions the gold to recover money.
Compared to LAPs, gold loans permit smaller ticket sizes. Some lenders offer loans up to ₹2 crores against gold. Since assessment is based on gold value, you can get disbursal faster while pledging minimum documentation. This makes gold loans ideal for quick, short-duration and small business loans.
Key Differences Between Loan Against Property and Gold Loan
Let us compare LAP and gold loans across key parameters:
Loan Amount
Loans against property often provide access to higher amounts based on property value and eligibility, while gold loans offer access to smaller loan amounts determined by the gold’s value. Loan limits vary by the loan provider.
Loan Tenure
LAPs have longer repayment tenures, similar to home loans. Gold loans have shorter tenures, with the option to renew periodically. This matches their use as short-term funds for needs like working capital.
Interest Rates
LAP interest rates are higher due to higher risk for loan providers. Gold loan rates are 8-10% on average, making repayment easier. Rates depend on lending institutions and applicant risk profile.
Disbursal Speed
Gold loans involve faster approval and disbursal within a few hours to a couple of days as minimal paperwork is required. LAP approval and disbursal may take up to a few weeks owing to paperwork like property valuation, legal checks, the applicant’s profile, etc.
Documentation
LAP requires extensive paperwork, such as income statements, property documents, legal checks, etc. Gold loans only need identity and address proof, minimizing documentation.
Risk and Repossession
In case of default, the lender's risk of recovering money is lower in gold loans, as auctioning gold is easier. Recovering money by selling the property during LAP default is difficult due to legal issues and property market risks.
Repayment Flexibility
Gold loans allow paying only interest every month and principal at the end of the tenure. LAP requires paying part of the principal every month, making repayment demanding.
Tax Benefits
Interest paid on LAP is tax deductible under income tax rules, offering monetary savings. Gold loan's interest does not provide a tax deduction.
Which Loan Option is Better for Different Scenarios?
The type of loan that would be more suitable for you between a LAP and a gold loan depends on your financial requirements, credit profile, and urgency, among other things. However, here are a few parameters that can determine which loan you are better suited for:
To Fund Large Expenses
LAP is more suitable for borrowing higher sums with longer tenures. You can fund large expenses for business, higher education of children, or real estate purchases through it. Gold loans are better for smaller, short-term fund needs.
For Quick Funds with Minimal Paperwork
Gold loans carry faster approval taking only income proof, unlike LAP's extensive documentation. This makes gold loans ideal for urgent small business, medical or debt consolidation needs.
Short-Term vs. Long-Term Needs
Gold loans suit short-term needs for up to 2 years, depending on the lender’s policies. For longer-term borrowing, LAP works better as most financial institutions allow tenure of up to 15 years. Its predictable EMIs also make planned repayment easier.
Risk Tolerance
If your income flow carries higher uncertainty, gold loans pose a lower risk due to repayment flexibility. Defaulting on rigid LAP repayment can mean losing your property.
Conclusion
Loans against property and gold loans help meet large and urgent funding needs while retaining ownership of assets. While LAP suits long-term goals requiring substantial money, gold loans are ideal for quick access to modest funds.
Examine the differences in parameters like loan amount, tenure, interest, LTV ratio, documentation, etc., before deciding the better option for your financial situation and borrowing needs. This will lead you to an informed decision, enabling productive use of funds and comfortable repayment.
