Choosing the right loan for your needs:
Loan against Property (LAP) vs. Gold Loan (LAG)

In the first part of this series, we discussed the comparative features of personal loans and gold loans. While these These are radically different in nature, as the gold loan is a secured loan, while the personal loan is an unsecured loan. Therefore, there are significant differences between a gold loan and the personal loan in terms of the amounts disbursed, etc. However, today wewe shall now compare two types of loans within the secured loan spectrum, viz. Loan against property (LAP) and Loan against Gold (LAG). The advantage of secured loans is that the credit score of the individual does not have a significant impact on the borrowing capacity, though it may marginally impact interest rates.

Loan against property is also widely known as a property or mortgage loan, as the property is hypothecated or pledged to the lender until the time that the loan is repaid. Loan against property (or LAP) is gaining traction in recent times as a suitable way of borrowing funds, mainly where larger sums are involved. Middle-aged consumers looking for funds to manage expenses of higher education, marriage of offspring in the family, investment in business or other high expense purchases prefer to go in for a mortgage against the property. Homes which have been bought earlier on which the home loan has been repaid, are usually assets with a high residual value as the value of the property would have appreciated in the period that the loan was being repaid. These can be used as secured assets to obtain a loan for big ticket expenses. Even in case of a home where the loan is currently underway, a top-up or loan extension can be taken by enhancing the loan amount in line with the current value of the property. For example, a home bought with a Rs. 20 lakh loan 10 years ago, may have appreciated to Rs. 30 lakhs in value in the interim period. By calculating the principal amount outstanding on the property, and the residual value, a loan for the balance amount (subject to credit norms) can be made to the borrower. This loan has a very low interest rate, as property is a highly secure asset on which loans can be given. Quantum of the loan depends on the value of the property, although 50-70% of the asset value can be borrowed easily. Additionally, the property remains in the possession of the borrower (although papers are deposited with lender until the loan is repaid). Processing time for an LAP can be anywhere between 7 to 30 days depending on the procedure involved, and possibly longer if the previous loan has to be closed, or there is a change of lenders in the process.

Gold loans too are a great option for secured borrowing. The biggest advantages of a gold loan are the speed and the repayment terms of the loan. While the interest rate is higher than that of a home loan or LAP, it still represents a much lower borrowing cost than a personal loan. This is mainly due to the fact that during the tenure of the loan, the borrower can choose to pay only interest, and repay the principal amount at the time of closure of the loan. Depending on the lender, 60-90% of the value of the gold jewelry can be taken as a loan. Also, the loan can be taken for short tenures, making it ideal to use for temporary cash flow shortfalls or emergencies. Also, the speed of disbursal of a gold loan is very fatfast, usually within the same day. Gold loans can therefore be used to meet temporary shortfalls in ready cash, such as a medical emergency, etc. However, in the case of a gold loan, physical possession of the asset passes to the lender, as gold is a liquid asset which can be sold easily and the lender borrower may have no control of over it should that happen.

Below is a comparative summary of the two kinds of loans: