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Why are Home Loans Cheaper Than Other Secured Loans?

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Highlights

  • Why are interest rates of home loans lower than other secured loans?
  • It could be due to the gap in the loan amount and tenure, etc - Read this post that explains each of these factors.

All secured loans have one thing in common – security or collateral that you need to submit to the lender to get them. Secured loans can be home loans, loan against property, gold loans, etc. While a home loan and loan against property are granted against the mortgage of the property, gold loans are offered based on the submission of gold ornaments to the lender. All these loans are disbursed at less than the value of the security or collateral. While a home loan is disbursed at 75%-90% of the property cost, loan against property and gold loans are disbursed at 60%-70% of the property value and 65%-90% of the value of the yellow metal, respectively. As a result, it makes lenders feel safe as they hold the right to seize the mortgaged asset if the borrower defaults on loan payments.

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Despite that all secured loans are disbursed based on the security or collateral, it’s a home loan whose interest rates are lower than other secured loans. Home loan interest rates can be around 7%-8.50% on average, whereas the interest rate of other secured loans can be in double digits. One may ask, why does it happen? It could be due to some reasons. One of them could be the difference in the loan amount between home loans and other secured loans. We, in this post, will highlight all those reasons that make home loans cheaper than other secured loans. Before that, you should know the purposes of these loans so that you could figure out things better.

Purpose of Home Loans and Other Secured Loans

A home loan is taken to buy, construct, extend and renovate a home. Whereas, other secured loans such as loan against property and gold loans are offered to meet personal expenses such as travel, marriage, medical emergencies, etc..

Reasons Why Home Loan Interest Rates are Lower

The prominent reason for the same can be the massive loan amount one requires to buy a home these days. Also, the massive difference in tenure between home loans and secured loans makes the former cheaper. Let’s focus on those reasons without any further delay.

Higher Loan Amount

Property prices vary from rural to urban locations in India. While the average price of the property in a rural location can range within INR 10-30 lakh, the same can be much higher at urban locations. The average home loan amount can be INR 10-25 lakh in rural areas, whereas you may require a loan of around INR 30-60 lakh (on average) to buy a home in urban areas. And, if the interest rate on such loans remains higher, the chances of default will be higher. A lot of borrowers might fail to clear the eligibility test too. It will then have a bearing on the credit growth of the bank or a housing finance company (HFC). Whereas, loan against property, gold loans, loan against shares, mutual funds and other financial instruments are the ones that help meet your personal expenses as stated above. Personal expenses will most likely be well short of home purchase requirements. Given the massive loan amount gap that exists between home loans and other secured loans, the home loan interest rate comes lower.

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Tenure

While a home loan can run for as long as 30 years, loan against property and gold loans can have a maximum tenure of 10 years and 3 years, respectively. On the other hand, loan against shares and mutual funds can be disbursed as overdraft for one year initially. Depending on your repayment behaviour, the lender can think of extending the tenure based on your request. The shorter tenure of secured loans, other than home loans, somewhat decreases the interest earning prospects of lenders from such credits. So, they charge a higher rate of interest on such loans to maximize interest earnings. Whereas, a home loan despite being offered at a much lower rate of interest, takes out much more from borrowers because of the extended length of this credit type. And, if the lender keeps the interest rate of home loans like other secured loans, borrowers will end up paying much more. To ensure borrowers are not pressed that hard, the home loan interest rates remain lower.

Price Volatility Risk of Home is Much Lesser

Home loans and loan against property are offered against an equitable mortgage of the property. Home prices are not that volatile, so lenders won’t be at a loss when they have to recover the money by selling the mortgaged asset if borrowers default for 6-7 months in a row. Whereas, the value of gold, shares, mutual funds and other financial instruments can go through extreme volatility. The value of these instruments can fall below the loan amount if the weak market sentiment prevails for long. Keeping in mind a negligible to nil price volatility risk in a home, lenders charge a lower home loan interest rate.

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Interest Rate of Home Loans and Other Secured Loans at Different Lenders

After looking at the reasons why the home loan interest rate is lower than that of other secured loans, it’s time to check the present rates of all these loans.

LendersHome LoanLoan Against Property (LAP)Gold Loan
State Bank of India (SBI)6.95% - 7.60%7.00% - 7.70%7.50%
HDFC Bank--10.05% - 17.95%
HDFC Limited6.90% - 7.65%8.75% - 10.40%-
ICICI Bank6.95% - 8.05%8.90% - 9.10%11.00% Onwards
Bank of Baroda7.00% - 8.40%8.20% - 13.35%9.75%
LIC Housing Finance6.90% - 7.90%9.50% - 10.50%-
Kotak Mahindra Bank7.40% - 9.70%9.50% - 11.70%10.50% - 24.00%
Axis Bank7.75% - 8.55%10.50% - 11.25%15.00%
Muthoot Finance--12.00% - 27.00%
Manappuram Finance--12.00% - 29.00%

The interest rate on a loan against shares and mutual funds may change from one individual to another based on the security mortgaged by the concerned person. Most likely, the rate on these loans remains higher than home loans, LAP and gold loans.

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HDFC Bank10.75% - 21.45%
ICICI Bank10.75% - 18.49%
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Kotak Bank10.99% - 20.99%
RBL17.50% - 24.00%
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Axis Bank7.75% - 8.55%
Bank of Baroda7.00% - 8.40%
Citibank8.20%
HDFC6.90% - 7.65%
ICICI Bank6.95% - 8.05%
Indiabulls Housing Finance Limited8.80% - 11.05%
Kotak Bank7.20% - 9.30%
LIC Housing6.90% - 7.90%
Piramal Capital & Housing Finance9.00% - 9.10%
PNB Housing Finance8.60% - 9.45%
Reliance Home Finance8.75% - 14.00%
State Bank of India/SBI6.95% - 7.60%
Tata Capital9.20% - 9.35%