With current market rates in most areas being extremely high, purchasing a property is extremely tough. If you are able to find a home that you like and can afford, you will consider yourself fortunate. But there are a select few who create their own luck by purchasing a plot of land and building a home with all of the amenities they desire. Even if a person has enough savings to purchase land, they may not have enough money to build a house. So there are two options for them a home construction loan and a personal loan. We compare the two loans – home construction loans and personal loans in this post to assist those wishing to build their own home.
What is a home construction loan?
A home construction loan is a loan issued only for the purpose of constructing a home on the property that the borrower already owns.
Advantages of home construction loan
The lower interest rate and longer term of a home construction loan are the most significant benefits. Currently, home construction loans have interest rates ranging from 8% to 12%, with a maximum loan term of 20 years.
Disadvantages of home construction loan
The loan is only available if the property is registered in the borrower’s name. i.e., to be qualified for a construction loan, the borrower must be a co-owner of a property. In such instances, the son or daughter cannot obtain a loan on their parents’ behalf.
The entire cash required for the building cannot be collected because banks only lend up to 80% to 85% of the total construction cost.
The second drawback is that the cash will be released in stages, for example, after a bank officer inspects the construction site to ensure that everything is going according to plan. As a result, there will be an overlook, and work will be delayed if the funds are not given on time.
Advantages of personal loan
A personal loan is an unsecured loan that can be used for whichever purpose the borrower desires. There is no monitoring, and the borrower will receive the funds in full. Higher loan amounts are available if you have a strong salary, work for a good company, and have a good credit score.
Disadvantages of personal loan
The most significant disadvantage of a personal loan is that it has a higher interest rate and a shorter repayment period. The interest rate ranges from 12 percent to 30 percent, with a 15 percent average. The maximum period of employment is merely five years. Another disadvantage is that the amount of a personal loan that a person is eligible for is determined by their income. As a result, if your wage is lower, your loan amount will be smaller.
When should you take out a personal loan to renovate your home?
Many banks provide promotional Personal Loans, such as a 0% Interest rate for the first six months. These kinds of loans may appear to be cost-effective, but make sure you can make all of your payments in full and on time, every time, or the higher interest rates may eat into your budget. Before agreeing on a loan, check about the greatest deals in town, just as you would with any other financial product.
A Personal Loan might also be useful in the event of unforeseen needs. Home renovation costs can only be estimated until the work begins, no matter how meticulously you plan everything. Most contractors, plumbers, and electricians will just provide you with an estimate; but, when renovation begins your contractor may discover something that requires immediate attention. You may want to take out a larger loan in order to cover such unplanned expenses.
Should you use a personal loan for home renovation
Whether or not you should take out a Personal Loan for home renovation relies on the quantity of money you need and the interest rate you’re offered. Before deciding on the Personal Loan, it’s a good idea to work out a trade-off. Personal loan interest rates can range from as little as 10.50 percent to as much as 33 percent. While a low-interest Personal Loan can help you deal with the unexpected financial demands of a home repair, a high-interest Personal Loan can be very pricey.
Personal Loans have the advantage of not requiring you to put up your house as collateral when you use the loan for home renovations because they are unsecured loans. However, they come with high-interest rates, and unless you truly need to renovate your home, a Personal Loan will almost certainly cost you more than it’s worth.
In metro cities, constructing a house will cost at least Rs.25 lakhs to Rs.30 lakhs, whereas in villages, it may cost considerably less. As you can see, the type of loan you get will be determined by the amount you need. If it is high, you should apply for a construction loan; if it is low, you should apply for a personal loan. Your loan type will be determined by the requirements.