When financial needs arise—be it for business expansion, medical emergencies, or funding your child’s education—two common borrowing options are Loan Against Property (LAP) and Personal Loans. While both serve similar purposes in terms of liquidity, they impact your credit score differently.
Let’s examine each loan’s operation to decide which is best for preserving or raising your credit score.
Understanding the Basics
Loan Against Property (LAP)
A Loan Against Property is a secured type of loan where you can pledge your residential, commercial or industrial property as collateral for funding up to a percentage of your property’s market value. Loan Against Property may also provide a lower interest rate as the lender is reducing risk with the loan or the Loan Against Property is secured with residential, commercial and industrial property.
Personal Loan
A personal loan is an unsecured loan, or there are no assets used for collateral to get the loan. It is based on your personal creditworthiness, income, and repayment history. Interest rates are generally somewhat higher when placing a loan however do not have a consideration to provide an asset for securing the loan.
Their Effect on Your Credit Score
- Type of Loan: Secured vs. Unsecured
When LAP is repaid on schedule, its secured status indicates responsible credit behavior. Because they are unsecured, personal loans are viewed as riskier and can marginally lower your credit score, particularly if you have several unsecured loans.
Credit Score Impact: Because LAP is backed by an asset, lenders and credit bureaus tend to view it more favorably.
- Loan Tenure and EMI Burden
LAP usually offers longer repayment tenures (up to 15–20 years), resulting in smaller EMIs and easier repayment. Personal loans generally have shorter tenures (1–5 years), leading to higher EMIs.
Credit Score Impact: Lower LAP EMIs lessen the likelihood of late payments, preserving a high credit score.
- Interest Rates and Repayment Comfort
LAP comes with lower interest rates compared to personal loans, making it easier to manage repayments. Timely EMI payments are crucial to maintaining a good credit score.
Credit Score Impact: Easier repayment due to lower interest rates in LAP reduces financial strain and minimizes default risk.
- Loan Amount Eligibility
Since LAP is secured, lenders offer higher loan amounts compared to personal loans. This means one LAP can fulfill large funding requirements, unlike taking multiple personal loans, which can hurt your credit profile.
Credit Score Impact: Opting for a single secured LAP instead of multiple unsecured loans is a safer and smarter move for your credit score.
- Credit Mix Advantage
When your credit bureau considers your overall credit utilization, it likes to see a balance of secured vs. unsecured credit. If your existing borrowings are mostly unsecured (credit cards, personal loans, etc.), taking a Loan Against Property will add secured debt to your overall credit profile.
Impact on credit score – A mixed portfolio of credit can help with your credit score over time.
When to Choose a LAP Over a Personal Loan
- You own property and can pledge it as collateral
- You need a large loan amount
- You want lower interest rates and EMIs
- You prefer a longer repayment period
- You want to strengthen your credit profile in the long term
When to Consider a Personal Loan
- You don’t have property to offer as collateral
- Your requirement is urgent and for a smaller amount
- You are confident of repaying quickly despite higher EMIs
- You do not want to risk a property lien
Which One Is Better for Your Credit Score?
A Loan Against Property (LAP) is the superior option for maintaining or increasing your credit score. Since LAP has a lower interest rate, a reasonable monthly payment EMIs, and less default risk, LAP demonstrates solid credit responsibility and is suggested for enhancing your creditworthiness.
Regardless of the convenience of a personal loan, a personal loan can create more pressure on your repayment capacity and may adversely affect your credit score if not appropriately managed.