Q: Hi Adhil. I’ve almost finalised the purchase of a home which I’m largely funding through my own funds. However, I’m falling short by about Rs. 7 lakh and planning to take a loan for it. Now, I can take a home loan for this amount, but I’m also considering a pre-approved personal loan for the same to reduce the paperwork and speedy disbursal. Will I be right in doing so? Kindly advise. – Ritwik.
Ans: Hello, Ritwik. My best wishes on your home purchase. Before answering your question, I would first want you to get complete clarity on your exact fund requirement. Because a home purchase involves a number of expenses that might not be covered by a home loan. For example, registration costs, title deeds, furnishing, etc. need to be borne through personal funds. On doing the calculations, you might realise your deficit is more than Rs. 7 lakh.
Now, for home purchase-related costs, it’s always better to go for a home loan than a personal loan despite a few additional formalities. Simply because:
Firstly, before approving a home loan, the lending bank or NBFC usually vets the property title and documents which makes your purchase a lot more secured.
Secondly, if you have a good credit score and a stable income, banks will currently offer you repo-linked home loans at record-low interest rates starting at 6.7% p.a., something that even the best personal loan offers (currently starting at 8.9% for salaried individuals) are unlikely to match.
Thirdly, home loans are also one of the best tax-saving instruments, unlike personal loans. You can claim tax deduction benefits up to Rs. 1.5 lakh on home loan’s principal contributions under Section 80C of the I-T Act, and up to Rs. 2 lakh on home loan interest contributions under Section 24B of the I-T Act.
Lastly, part-prepayments and pre-closure towards floating interest rate home loans involve no additional charges which might not be the case with a personal loan.
As such, do your calculations thoroughly and make an informed decision. I would suggest going for a home loan would be better even if it involves some extra paperwork. Also, even if you have the necessary cash, try not to invest everything towards your home purchase as maintaining an adequate emergency fund and savings for other critical financial goals like adequate insurance coverage and critical investments are equally important. Wish you all the very best!
Have a question on personal finance? Ping me on Twitter at @adhilshetty with the hashtag #AskAdhil. The writer is CEO, BankBazaar.com, an online marketplace for loans and credit cards. Need help in calculating your EMI? Use BankBazaar’s easy home loan EMI calculator and Personal Loan EMI calculator.