A personal loan is a financial tool that caters to different needs. From renovating your house to expanding your business, you can utilise the personal loan amount for various purposes. In this article, we are going to explain how you can use a personal loan to pay the down-payment of a home loan. Although the home loan process has become more straightforward than it was in the past, making a down-payment is still difficult while managing your daily expenses.
Saving for a down payment is critical when you are willing to apply for a home loan. A down payment is an initial payment made when you are borrowing a significant loan amount from any financial institution. Although the loan applicants need to pay this amount with their funds, saving for it is not the only way to make the down-payment for a home purchase. You can also opt for a personal loan to pay the down-payment.
A personal loan provides you with sufficient funds to pay the down-payment for a home loan. Many banks in India provide such loans to applicants without lengthy procedures. Seems very straightforward, isn’t it?
But wait, before applying for a personal loan to use it as a down-payment, you must consider the following things.
No Need for Security or Collateral
Lending institutions do not ask you to provide any security or collateral when you are applying for a personal loan. Instead, they check your credit history and credit score to decide your eligibility and interest rates. Therefore, when your credit history is good, then there is a chance of you getting attractive interest rates on a personal loan.
Availability of Funds in a Short Time
Various banks and financial institutions give quick approvals on personal loans for applicants who have a good credit score and proper documentation. As a result, you do not need to wait for funds to pay your down-payment and get your home loan application sanctioned in a short time. Although you are required to pay two EMIs i.e. home loan and personal loan, the tenure of personal loans can be as short as one year. After repaying the personal loan, you can just concentrate on paying the home loan EMIs.
Your Total Income
The one most important thing every borrower needs to strictly follow is that the EMIs should never be more than 40% of your total income. If you are planning to get a personal loan to pay the down payment you need to calculate both EMIs and check whether they are affordable.
For example, assume you have selected a property worth Rs. 50 lakh. Out of this, 80% will be covered by home loan (Rs. 40 lakh), whereas you have to pay 20% (Rs. 10 lakh) as a down payment. Now, if have taken a personal loan for a down payment, the EMI for both loan will be,
|EMI||Interest Rate||Tenure in years|
|Home Loan||Rs. 52,968||9.75%||15|
|Personal Loan||Rs. 22,753||13%||5|
So, you would be paying Rs. 75,721 at the end of every month as EMIs of both loans.
A personal loan borrower can claim a tax exemption of up to Rs. 2 lakh on the interest paid against a personal loan if the borrower is using the loan amount to make the down payment for a housing loan.