What is the difference between a home loan and a personal loan?

What is the difference between a home loan and a personal loan?

Home Loan:

Home loans differ substantially from a personal loan. A Home loan can only be used for obtaining a home. Home loan is offered to persons who want to construct or purchase a house. The property is mortgaged to the lender as the security till the repayment of the loan. Here the property itself acts as a collateral. The lending institution will hold the title or deed to the property until the loan has been paid back with the interest due for it.

Home loan: interest rate, term and amount:

  • A home loan is exclusively used for purchasing an existing apartment, flat, house, building, converting or renovating a dwelling or buying a building plot.
  • The home loan term can be longer: Commonly from 5 to 30 years.
  • Three types of interest rates are possible: a variable rate, a fixed rate, and a reviewable fixed rate. In case of variable rate, the monthly payments will change from one year to another that can be revised after 3, 5 or 10 years for a reviewable fixed rate and it remains fixed for a fixed rate.
  • The amount borrowed can be depended upon your income, your ability to repay and property value (80-90%). Most lenders require 10-20% of the property’s purchase price as a down payment from you.

The guarantees required by the lender for a home loan is more substantial: your financial solvency is not enough, you have to get a mortgage, a debt instrument secured by the collateral of specified real estate property that you are obliged to repay, and your lender can request additional guarantees like a debt balance insurance that covers the outstanding balance of the loan in the event of your death.

Personal Loan:

A personal loan is a consumer loan and it can take two main forms. A personal loan associated with a particular project allows you to use money in personal projects like purchasing a furniture, new car or computer, the organization of your wedding or even the renovation of your house. For this type of personal loan, you need to provide proof of purchase or use of the loan (for example estimation of costs for renovation works).

On the other hand, an unspecific personal loan allows you to meet your cash requirements or to finance unexpected expenses. This is a personal, non-amortizing loan. You can use the borrowed money for any purpose. You don’t need to explain the use of the loan.

Personal loan: interest rate, term and amount:

  • It is a fixed interest rate loan i.e; Annual Percentage Rate of Charge (APRC) and the EMIs are equal;
  • The maximum amount that can be borrowed depends on the purpose of the loan, Your income, and ability to repay.
  • The loan terms vary from 6 months to 60 months;
  • The monthly payments, amount and term are determined in advance and not reviewable during the term of your loan (except prepayments).

A personal loan for works or a home loan?

Though the differences between the home loans and personal loans may be clear to you now, it is still not always obvious.  Let us suppose that you want to borrow money from your lender for renovation works? Which loan will you take now a personal loan or a home loan? It depends on the terms of your loan and the amount to be borrowed: if you want to borrow large amount and/or get a loan term longer than 5 years, it is good to take out a home loan. But don’t forget that home loan interest rates are generally more attractive than personal loan interest rates but, in this case, you need to pay additional costs like mortgage costs.