Which is Better: Loan against property or loan against Fixed Deposits?

For salaried and self-employed professionals, finance options in India are on the rise. Loans are of two types: secured and unsecured. If you submit collateral to the bank/NBFC to avail funds, it is called secured loans, while funds approved without any pledging of properties are called unsecured loans. Secured loans have the advantages of lower interest rates over unsecured loans. 

One of the prime examples of unsecured loans is a personal loan, and the examples of secured loans are loan against property, loan against fixed deposits, etc. In the below sections of the article, we will compare both secured loan types, and you can decide on the best based on this comparison.

What is a loan against property?

As the name states, a loan against property (LAP) is pledging your property to the financial institution to get funds in exchange for them. They are one of the popular loan types for long term finances. The higher the valuation of the property, the more amount you can get approved by the bank/NBFC. 

Advantages of LAP:

  • Interest rates are between 11%-15%, which are relatively lower than personal loans
  • Both resided and leased out property can be used for availing loans, thus, providing the flexibility to monetize 
  • Can be availed as a one-time payment or as an overdraft facility
  • No penalty charges for prepayment 

Disadvantages of LAP:

  • Processing time is usually longer since the banks/NBFCs need some time to do the background check on the borrower
  • The usual expectancy of LAP is 70% of the property in which a loan is availed. But since different financial institutions have varying rates, you need to browse a lot to get the ideal financial partner
  • The risk lies in the fact that the banks/NBFCs have the authority to sell the property if you cannot pay the dues on time
  • Compared to home loans, LAPs do not have tax exemption. Such a practice might put the borrower in a fix whether he needs to go for this particular loan type

What is Loan against FD?

Fixed deposit (FD) are the commonly used investment options in India, and the usage continues to grow gradually. Not many know that you can avail loans against FD, and by doing so, you get a secured loan with a lower rate of interest, without disturbing your savings.

Advantages:

  • The bank/NBFC charges the interest only on the utilized amount of the FD and not on the total amount
  • Faster approval and minimal documentation
  • Have flexi-repayment option

Disadvantages:

  • The financial institution can foreclose the FDs to recover the loan amount
  • The tenure of the loan taken against the FD cannot exceed the tenure of the fixed deposit

Key Takeaways:

Loan against FDs scores better than loan against property in terms of processing time and documentation as the financial institutions have a higher obligation to check various metrics associated with LAP. However, you can take financial advice from a reputable bank/NBFC on both the loans and make a decision accordingly. 

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