Should You Take a Personal Loan for Home Loan Down Payment?

To know whether you should take a personal loan for paying a home loan down payment, let us see its pros and cons.

Pros of taking a personal loan for a Home Loan Down Payment:

1. Quick availability of funds:

Personal loans are known for their quick and easy loan process. Once you apply by providing all the required information and uploading the required documents, you will get a confirmation message from the lender. After verification of your profile and documents, the lender will approve or reject the loan application. And a significant advantage is that you get all the loan application updates through emails and/or messages. The loan approval process typically takes 2-7 days after you have submitted all the required documents, depending upon the lender's terms and conditions. Once approved, the disbursement can take another 1-2 days.

We suggest you check with your existing bank for personal loan offers before searching anywhere else. Nowadays, many banks offer pre-approved and pre-qualified personal loans based on your credit history and banking relationship. If you apply with such online pre-approved offers, you may get the personal loan amount disbursed in your account within a few minutes!

2. Flexible repayment term:

A Personal Loan tenure offers a flexible repayment term of 1 year to 5 years and the borrower gets to decide the loan tenure based on his/her convenience and requirements. The tenure can get extended up to 7 years in special cases. Furthermore, some fintech app loans of small amounts offer a loan tenure from 6 months to 24 months. However, they are typically small-amount loans that come with huge interest rates.

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3. No collateral:

The biggest advantage of a personal loan is that it does not require any collateral, and this means you do not have to pledge any assets as you would for other secured loans like a home loan, car loan, loan against property, etc. Furthermore, you also do not need a guarantor to avail of a personal loan.

4. No need to break your savings or awkward borrowing requests:

When you are facing a cash crunch, you broadly have two options; either to break your investments or borrow from friends/family. When you have invested with a long-term financial plan, breaking the investment might not prove to a wise choice. Whereas, borrowing money from your close ones can strain your relationship with them. Moreover, meeting them at family functions or get-togethers can create awkwardness, especially if you are unable to repay the money on a promised date. Since most people do not make any agreement when borrowing from their friends or family, there could be misunderstandings in assuming the loan terms, which can affect their relationship. Not being able to timely repay the dues can even lead to disputes that make your relationships bitter. Whereas, in the case of a personal loan from a financial institution, the delay in loan repayment will result in late payment fees charged by the lender and have no impact on your relationships.

5. Tax implications:

As you might know, personal loan repayments do not offer tax benefits. However, if you have taken a personal loan for the down payment on a home loan, you can claim tax deductions up to Rs 2 lakhs annually on the interest payments made.

Cons of taking a personal loan for a home Loan Down Payment:

1. High rate of interest:

The rate of interest is the major con of personal loans as they have the highest rate of interest. The personal loan interest rate generally ranges from 12% to 28%. When your repayment tenure is a longer duration of 4-5 years, you end up paying a lot more than the principal amount. Many banks lure customers with different offers by marginally reducing the rate of interest by 0.20% to 0.50%. Advisably, if your credit history is sound and your credit score is high, you can use it as leverage to negotiate a better rate of interest with your bank.

2. High credit score requirement:

Since personal loans are unsecured, the lenders use several parameters to calculate your loan eligibility, such as credit score, credit history, age, employment status, monthly income, existing loans, etc. Your credit score plays a significant 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 let you check your eligible loan amount through online calculators. Once you provide your financial details, it will show the approximate loan amount you are eligible for.

3. Home loan lenders might not prefer:

When you avail of a new loan, your credit score, eligible amount, and several other factors change. Since it increases your liability, some home loan lenders might not get ready to offer you a home loan, especially when the personal loan is not taken from a reputed lender.

Should you take a personal loan for paying a down payment of a home loan?

While a personal loan has several advantages and it is tempting to make a down payment with a loan, bear in mind that it is the costliest loan and you should weigh all other options before opting for it. It is advisable to not opt for a personal loan unless you have exhausted all the other options. However, if you think that breaking your investment could 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 loan lender wisely. If you do not have sufficient savings to make the down payment of your home loan, you may consider opting for a personal loan, but remember the borrowing thumb rule that says you should be able to afford at least a 20% down payment when availing of a new loan to ensure a smoother repayment.

Warm Regards,
Ketki Jadhav
Content Writer