- Why are personal loan interest rates higher than that of home loans?
- There are various reasons for the same - Read this post to know those
The two most popular loans of today’s times would most likely be – personal loans and home loans. These two loans together could constitute a massive chunk of banks’ loan books. Given the popularity of these two, lenders often come with promotional offers where interest rates remain quite lower than usual. Even then, personal loan interest rates can be found more than that of home loans. The reasons for the same can be many which we will discuss here. So, if you are new to credit, knowing the same will only boost your knowledge. All you need to do is read further.
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Let’s Check Out the Reasons
The setting of the interest rate of any loan depends on the credit risk it poses for lenders. As both loans come with different levels of credit risks, the variation in interest rates is all the more obvious. Let’s focus on the reasons that cause variations between the interest rate of two loans.
This is the biggest factor that makes home loans cheaper than personal loans. A home loan comes with an equitable mortgage of the property you wish to buy with the same. So, if you go on to default later and don’t make payments despite repeated reminders, the lender can seize your property and sell it in the market to recover the pending dues. All that puts the lender in a safe position. In comparison, there’s no role of collateral or mortgage in a personal loan, making it riskier for lenders. Here, if you default, the lender won’t have anything to fall back on. The higher credit risk makes lenders increase the interest rate of personal loans.
Differences in the Average Loan Amount
There’s a massive difference in the average loan amount availed by people in each of these two loans. Personal loans are generally offered in the range of INR 15-20 lakh, with only a few lenders raising the lending limit to around INR 40-50 lakh. In contrast, the average ticket size of home loans could be around INR 30-60 lakh. And, if the interest rate of personal loans is applied on home loans, many would lose out on the eligibility part and fail to buy their dream home. To ensure a greater adoption rate of homes, the interest rate remains in the single digit. If we consider the current market scenario, home loan interest rates can be around 7-8.50% per annum. In comparison, personal loan interest rates start from 10.50% and can go as high as 25%, giving you a fair idea of how many would fail to meet the eligibility if lenders put such high rates on a home loan.
Differences in the Loan Tenure
While a home loan runs for as long as 30 years, a personal loan can be offered for a maximum of 5 years. Only a handful of lenders offer a personal loan for 6-7 years. So, you can see a massive difference in the tenure of these two loans. A home loan due to its extended tenure leads to much larger interest obligations for borrowers compared to a personal loan. But if double-digit rates of personal loans apply here, the interest obligation can be way beyond, leading to less offtake of home loans.
But Home Loan Interest Rates Can be at Par with the Starting Rate of Personal Loans!
It might leave you stunned, but it’s true! Home loans have two rate mechanisms – fixed rate and floating rate. The single-digit rate of home loans that we saw above was a floating one, which people often opt for. The rate changes here with the change in the Repo Rate, the rate at which the Reserve Bank of India (RBI) lends to commercial banks. When the Repo Rate goes up, the floating rate follows, and the other way round when the former comes down. But when you apply for a fixed rate home loan, the rate will not change throughout the loan tenure. This makes many go for it only to lose in the end. The rate of interest remains a couple of percentages higher than a floating rate home loan. So, don’t be surprised if you are offered a fixed interest rate of 10-11%, at par with the starting rate of personal loans.
If you think a floating rate home loan will bring changes to the EMI with a change in the interest rate, you are in a myth! There will be no change in the EMI. What will change though is the component of EMI – Principal and Interest – with the change in floating loan rates. When the rate comes down, there will be more deduction of principal and more interest when the rate goes up. If a larger part of your home loan journey sees a constant reduction in the interest rate, your loan could finish earlier than scheduled.
Interest Rates of Personal Loans and Home Loans
After knowing the reasons that push up the interest rate of personal loans more than that of home loans, it’s time we check the rates of these two loans across different lenders.
|Top Lenders for Personal Loans||Personal Loan Interest Rates (In Per Annum)||Top Lenders for Home Loans||Home Loan Interest Rates (In Per Annum)|
|State Bank of India (SBI)||9.60% - 13.60%||State Bank of India (SBI)||6.80% - 7.35%|
|HDFC Bank||10.75% - 21.30%||HDFC Limited||6.80% - 8.00%|
|ICICI Bank||10.75% - 17.50%||ICICI Bank||6.90% - 8.05%|
|Kotak Mahindra Bank||10.75% - 17.99%||LIC Housing Finance (LIC HFL)||6.90% - 7.90%|
|YES BANK||10.45% Onwards||PNB Housing Finance (PNBHFL)||7.35% - 9.10%|
|Bajaj Finserv||10.99% - 16.00%||Bank of Baroda||6.85% - 8.25%|
|IDFC First Bank||10.49% - 32.00%||Bank of India||6.85% - 7.75%|
Although there’s a difference between the interest rate of two loans, they can’t be compared. The reason being the purpose of these two loans is different. While a personal loan is given for multiple purposes such as marriage, travel, education, medical emergencies and other personal expenses, a home loan can be taken to buy, construct, renovate or extend a housing unit. The home loan is also given to buy a plot. Comparisons of personal loans should be done with loans granted against securities such as fixed deposits, mutual funds, shares, bonds, life insurance policy, etc. These loans can be taken to fulfill purposes that people do with a personal loan.