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 unique features, pros, and cons. It is recommended that you choose the most appropriate type of loan based on your requirements.
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.
You should consider certain factors when considering a business loan or any other type of credit facility. These include equated monthly installments (EMIs), interest rates, loan tenure, and LTV.
All types of loans include a certain interest rate. It is the cost of availing of the funds and using them for some time. This interest rate is determined based on your credit rating and the repayment tenure. Generally, lenders levy higher business loan interest rates because these are unsecured and risky.
2. Loan tenure
When you choose a longer repayment tenure, the EMI is lower. Generally, a loan against property offers a 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. A LAP is more advantageous if you require the funds for a longer duration.
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3. Eligibility
When you choose to avail of a loan, you must meet the eligibility criteria. These include your income, credit score, age, and documentation. Your credit rating is crucial in determining your eligibility for an unsecured business loan; a loan against property eligibility, on the other hand, depends on the asset value.
4. Documentation
Generally, the documents needed to avail of an unsecured credit facility are less than those required when applying for an LAP. This is because, besides your basic documents, you must submit property-related documents when available for an LAP.
The following table summarizes the differences between an unsecured loan and an LAP.
| Difference | Business loan | 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, 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, you must compare the various products different financial institutions offer. Furthermore, assessing your 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.
