The availability of funds has increased remarkably over the past decade because banks and non-banking financial companies (NBFCs) offer different types of loans. This has enabled businesses to grow without any constraints.
Loans may be classified into secured and unsecured loans. Both types have their unique features, pros, and cons. Based on your requirements, it is recommended to choose the most appropriate type of loan.
A loan availed of by mortgaging a property is secured and is known as a loan against Property (LAP). When you avail of a LAP, you receive a certain percentage of the asset value. This is known as Loan to Value (LTV). Loans issued without any collateral are known as unsecured loans.
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When you consider a business loan or any other type of credit facility, you should keep in mind certain factors. These include equated monthly installments (EMIs), the rate of interest, loan tenure, and LTV.
- Rate of interest
All types of loans include a certain interest rate. It is the cost of availing of the funds and using them for a period of time. This rate of interest is determined based on your credit rating and the repayment tenure. Generally, lenders levy higher business loan interest rates because these are unsecured and are risky.
2. Loan tenure
When you choose a longer repayment tenure, the EMI is lower. Generally, a loan against property offers longer duration when compared to unsecured business finance. Furthermore, when you compare the servicing charges and interest rates, the unsecured business finance rate is higher than the loan against property interest rates. If you require the funds for a longer duration, a LAP is more advantageous.
When you choose to avail of a loan, you need to meet the eligibility criteria. These include your income, credit score, age, and documentation. Your credit rating plays a crucial role in determining your eligibility for an unsecured business loan, loan against property eligibility on the other hand, depends on the asset value.
Generally, documents needed to avail of an unsecured credit facility are lesser when compared to those required while applying for a LAP. This is because in addition to your basic documents, you will need to submit property-related documents when you avail of a LAP.
The following table summarizes the differences between an unsecured loan and a LAP.
|Collateral||Unsecured||Any property (commercial, residential, or industrial)|
|Loan amount||INR 3 lakh – INR 75 lakh||INR 5 lakh – INR 10 crore|
|Repayment tenure||1 Year – 4 years||Up to 15 years|
|Eligibility||Retailers, doctors, chartered accountants, traders, professionals, and manufacturers, and private and public limited companies||Partnership and sole proprietor firms, salaried or self-employed professionals, micro, small, and medium enterprises|
Before you decide on one of these loans, it is important you compare the various products offered by different financial institutions. Furthermore, assessing your personal requirements will help you make an informed decision. In addition to your needs, you must consider your repayment capability to choose one of these options.