August 05, 2022
Listen Should you take out a personal loan for the down payment on a home loan?
Buying a home involves a lot of planning and preparation, making it one of the most important and defining decisions of our lives. It’s also one of the biggest investments we make, both financially and emotionally. Therefore, we all go out of our pockets a bit when buying our dream home. Although home loans are a great help, it can sometimes be difficult to pay a small percentage of a down payment in certain situations, such as when we are unprepared, do not want to break our investments or when the value property is too high. high. If you’re in a similar situation and are considering taking out a personal loan with a down payment on a home loan, read this article to find out if this is the right option to consider.
To find out if you should take out a personal loan to pay off a mortgage down payment, let’s see its advantages and disadvantages.
Advantages of taking out a personal loan for a mortgage down payment:
1. Rapid availability of funds:
Personal loans are known for their quick and easy loan process. Once you have applied by providing all the required information and uploading the required documents, you will receive a confirmation message from the lender. After verifying your profile and documents, the lender will approve or deny the loan application. And a significant benefit is that you receive all loan application updates by email and/or message. The loan approval process usually takes 2-7 days after you submit all required documents, depending on the lender’s terms and conditions. Once approved, the payout may take another 1-2 days.
We suggest you check with your existing bank for personal loan offers before looking elsewhere. Many banks these days offer pre-approved and pre-qualified personal loans based on your credit history and banking relationship. If you apply with such pre-approved offers online, you can get the personal loan amount disbursed in your account within minutes!
2. Flexible repayment term:
A personal loan term offers a flexible repayment tenure from 1 year to 5 years and the borrower can decide the loan term according to his convenience and requirements. The mandate can be extended up to 7 years in special cases. Additionally, some small amount fintech app loans offer a loan term of 6 months to 24 months. However, these are usually small loans with huge interest rates.
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3. No Warranties:
The biggest advantage of a personal loan is that it doesn’t require any collateral, which means you don’t have to pledge any assets like you would with other secured loans like a home loan, car, mortgage, etc. Moreover, you also do not need a guarantor to qualify for a personal loan.
4. No need to break your savings or clumsy loan applications:
When you face a cash shortage, you basically have two options; either to break your investments or borrow from friends/family. When you have invested in a long-term financial plan, breaking the investment may not be a wise choice. While borrowing money from loved ones can strain your relationship with them. In addition, meeting them at family functions or meetings can create discomfort, especially if you are unable to repay the money on the promised date. Since most people do not enter into any agreement when borrowing from friends or family, there could be misunderstandings in agreeing to the terms of the loan, which can affect their relationship. Not being able to repay dues in a timely manner can even lead to disputes that sour your relationships. While in the case of a personal loan from a financial institution, the delay in repaying the loan will incur late fees charged by the lender and will have no impact on your relations.
5. Tax consequences:
As you may know, personal loan repayments do not offer tax advantages. However, if you have taken out a personal loan for the down payment on a home loan, you can claim tax deductions of up to Rs 2 lakhs per annum on the interest payments made.
Disadvantages of taking out a personal loan for a home loan:
1. High interest rate:
The interest rate is the main disadvantage of personal loans as they have the highest interest rate. The interest rate for personal loans generally ranges from 12% to 28%. When your repayment term is a longer term of 4-5 years, you end up paying much more than the principal amount. Many banks lure customers with different offers by slightly reducing the interest rate from 0.20% to 0.50%. Preferably, if your credit history is strong and your credit score is high, you can use this as leverage to negotiate a better interest rate with your bank.
2. High Credit Score Requirement:
Since personal loans are unsecured, lenders use several parameters to calculate your loan eligibility, such as credit rating, credit history, age, employment status, monthly income, existing loans, etc. Your credit rating plays an important role in calculating your repayment capacity. . Since personal loans are unsecured loans, lenders would be inclined to offer you the loan only when you have a good to excellent credit score. Many websites allow you to check your eligible loan amount through online calculators. Once you have provided your financial information, the approximate loan amount you are eligible for will be displayed.
3. Real estate lenders may not prefer:
When you get a new loan, your credit score, eligible amount, and several other factors change. Since this increases your liability, some home lenders might not be willing to offer you a home loan, especially when the personal loan is not from a reputable lender.
Should you take out a personal loan to pay the down payment on a home loan?
Although a personal loan has several advantages and it is tempting to make a down payment with a loan, keep in mind that this is the most expensive loan and you should weigh all other options before deciding. opt for this one. It is advisable not to opt for a personal loan unless you have exhausted all other options. However, if you think that breaking your investment might affect more than paying the high interest rate, you should compare different lenders, negotiate with your existing lender or bank, and then choose the personal lender wisely. If you don’t have enough savings to make the down payment on your home loan, you may want to consider a personal loan, but remember the borrowing rule of thumb that says you should be in able to pay at least 20% down payment when you take out a new loan to ensure a smoother repayment.