Home Loans versus Personal Loans
As they say, not all loans are the same and not all borrowers are the same.
Two very popular types of loans in India are home loans and personal loans.
Home loan is the loan given by a bank to acquire a house property. Against the home loan, the borrower mortgages the property with the bank till the time the loan is fully repaid. That is why the home loan is called a secured loan. Being a secured loan of a larger amount, the home loan tenure extends longer for up to 20 years or 25 years in most cases. The rates of interest on home loan are also quite low AND there are tax benefits under Section 24 and Section 80C.
Now let’s look at personal loans. They are unsecured loans given by banks to individuals for any consumption requirement, business need, domestic functions etc. They are unsecured meaning the person’s credit score is the only thing they have as assurance that the loan will be repaid. Unlike the home loans, the personal loans are typically taken for any generic purposes, although the personal loan agreement prohibits investing the loan amount in stock markets or in any speculative activity. The rate of interest is much higher in personal loans and the tenure is generally between 3 years and 5 years.
Personal Loan and Home Loan Together? But Why?
This typically happens when a person has taken the home loan to pay for the apartment. Now there are some obvious implications. Most people end up emptying their wallets in the home purchase, interiors etc. By the time they have to pay other expenses like furnishing, painting, renovation etc, they are left with little money.
Generally, top-up loans are only available after a period of 1 or 2 years. In the short term, the borrower would typically depend on a personal loan.
People often wonder whether you can take a home loan and personal loan simultaneously?
The answer is there is no such restriction except that you need to keep a tab on your credit standing, CIBIL score and your cost of servicing the funds. Otherwise, it is ok to combine personal loan and home loan to complete the cycle of spending for the home.
How Should the Personal Loan Be Utilized?
Since the personal loan is a high cost loan (and combined with another liability on your head, that is the home loan), use the personal loan funds very prudently.
Firstly, any risky investments are strictly out of the way and you should not even consider it.
Secondly, avoid using the funds to splurge on expensive décor, curtains and other such items that do not add much productive value.
Instead, you may use the money to fill up the margin needs and the other costs like registration of property or use it for something productive like a laptop.
In addition, use these funds to create two types of emergency funds. You can create a back-up emergency fund to meet about 3 months expenses. You can also use the money to create a back-up fund of at least 3 EMIs. That should be truly productive combination of home loan and personal loan.
Conditions For Combining Home Loan and Personal Loan
In your own interest, you should follow some basic ground rules if you are combining home loan and personal loan at the same time. Here is a framework of steps you must take.
- Ensure that your CIBIL score continues to be healthy. Your CIBIL score gets updated each month. At the end of each month, check the change in the score and also check the reasons for the change. Continuous monitoring of credit score is at the core of successfully combining a personal loan and home loan.
- Reduce the number of loans. Don’t keep too many small loans if you are combining a home loan and personal loan. Ideally, you can close the smaller loans or you can look to consolidate all the outstandings into a single loan. This will not only reduce your EMI amount but also make it more elegant.
- Lenders take your repayment capacity quite seriously, so ensure that when you combine the home loan and the personal loan, your credit standing and your debt to income ratio does not get impacted. While there are not hard and fast rules, your total debt servicing must not exceed 40% of your income each month. That is comfortable scenario and if it has gone above that, then take measures to bring it back to the normal level.
- You can plan your personal loan better. If you feel that the personal loan EMI can create a burden, you can either opt for a gold loan based overdraft OR you can leverage your shares or mutual fund holdings to get an overdraft limit. Here, you only pay interest on the amount utilized and can repay the loan any time, without costs.
In today’s competitive market, banks and NBFCs are falling over one another to extend personal loans to you. You just need to be a tad prudent on this front.