Land Loans vs. Home Loans: Deciphering the Differences and Finding the Right Financing Option

difference between plot loan and home loan


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Last updated on 12th April 2024

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When it comes to realizing the dream of owning a property, there are various financial avenues to explore. Two common options are plot loans and home loans. These financial products serve distinct purposes, and understanding the difference between them is crucial for making an informed decision. In this blog post, we will delve into the nuances of plot loans and home loans, helping you grasp their dissimilarities and guiding you towards the right choice for your property aspirations.

Plot Loan: Unearthing the Basics

A plot loan, often referred to as a land purchase loan, is a type of financial assistance provided by banks and financial institutions to purchase a piece of land or a plot. This land can be used for various purposes, such as constructing a residential or commercial building or for investment purposes. Here are some key characteristics of plot loans:

  • Purpose: Plot loans are exclusively meant for purchasing land or plots. They do not cover the construction of a house or any other structure on the acquired land.
  • Loan Amount: The loan amount for a plot loan typically covers a percentage of the land's cost, with the remaining amount to be paid by the borrower as a down payment.
  • Interest Rate: One crucial factor to consider when comparing plot loans is the plot loan interest rate. These rates can vary significantly from one lender to another, affecting the overall cost of borrowing. It's essential to shop around and compare interest rates to find the best deal for your land purchase.
  • Loan Tenure: The tenure for plot loans is usually shorter compared to home loans, often ranging from 10 to 15 years. Shorter tenures can result in higher EMI payments.

To get an idea of your potential Equated Monthly Installment (EMI) payments, you can use online tools like a land loan EMI calculator or a plot loan calculator.

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Home Loan: Building the Dream

Home loans are perhaps the most well-known form of property financing. They are designed to help individuals purchase a residential property, including the land and the construction of the house. Here are the key aspects of home loans:

  • Purpose: Home loans are intended for buying or constructing residential properties. They cover both the land and the construction costs. Home loans are mostly availed on ready to move-in houses.
  • Loan Amount: Home loans typically cover up to 90% of the property's cost, depending on the lender and the borrower's eligibility. The remaining amount is to be paid as a down payment.
  • Interest Rate: Home loan interest rates of all banks and nbfc's are usually lower than those of plot loans because the presence of a constructed property reduces the lender's risk.
  • Loan Tenure: Home loan tenures are more flexible and can range from 15 to 30 years, resulting in lower EMI payments.
  • Tax Benefits: Home loans come with attractive tax benefits. Borrowers can claim deductions on both the principal amount (under Section 80C) and the interest paid (under Section 24) of the loan.

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Key Differences Between Home Loan and Land Loan

Now that we've explored the basics of both plot loans and home loans, let's highlight the key differences between these two financial products:

Factors Plot Loan Home Loan
Purpose Exclusively for purchasing land or plots. For buying or constructing residential properties, including land and house.
Loan Amount Covers a percentage of the land cost, with a larger down payment required. Covers a significant portion of the property cost, with a comparatively smaller down payment.
Interest Rate One of the critical factors to consider when choosing a plot loan is the plot loan interest rate. These rates can vary significantly, affecting the overall cost of borrowing. It's essential to compare interest rates among different lenders to find the most competitive option for your land purchase. For instance, you can use tools like an SBI plot loan calculator or an HDFC plot loan EMI calculator to estimate your potential EMI payments based on the interest rate. Offers lower interest rates compared to plot loans, as the property serves as collateral, reducing the lender's risk.
Loan Tenure Shorter tenure, usually ranging from 10 to 15 years. Longer tenure, ranging from 15 to 30 years.
Tax Benefits Limited tax benefits as it does not involve property construction. Offers tax benefits on both the principal and interest payments.
Documentation Involves detailed documentation to verify land legality and intended use. Focuses on property ownership and financial details of the borrower.

Choosing the Right Loan for You

The choice between a plot loan and a home loan ultimately depends on your specific goals and circumstances:

  • If you only intend to purchase land: Opt for a plot loan. This is ideal if you plan to invest in land or construct a property at a later stage.
  • If you want to buy land and build a house: A home loan is the way to go. It provides the flexibility to cover both the land and construction costs.
  • Consider your financial situation: Assess your financial stability, including your down payment capacity and EMI affordability. This will help you decide which loan aligns better with your financial standing.
  • Tax planning: If you are looking for tax benefits, a home loan is the clear winner, as it offers deductions on both the principal and interest payments.
  • Interest rates: Compare interest rates from various lenders and analyze the overall cost of borrowing for each type of loan. To make this process easier, consider using online EMI calculator tools to estimate your potential EMI payments based on different interest rates.
  • Loan tenure: Choose a loan tenure that suits your repayment capability. Keep in mind that shorter tenures result in higher EMIs but lower overall interest payments.

Suggested read: Subsidy on home loan by government 2023

In conclusion, both plot loans and home loans are valuable tools for realizing your property dreams, but they serve different purposes and come with varying terms and benefits. Carefully evaluate your requirements, financial situation, and long-term goals to make an informed decision. Consulting with a financial advisor or loan expert can also provide valuable insights and guidance on which loan option aligns best with your aspirations and resources. Whether it's a plot loan or a home loan, making the right choice can bring you closer to the joy of property ownership. When comparing plot loan interest rates, make sure to shop around and use tools like a plot loan calculator to find the best deal for your land purchase. Ultimately, the bank that is best for a plot loan will depend on your specific needs and the terms offered by different lenders.

FAQs about Difference Between Home Loan vs Plot Loan

The choice between a home loan and a plot loan depends on your specific goals and circumstances. If you want to purchase land and construct a house, a home loan is suitable. If you only intend to buy land, then a plot loan is more appropriate.

Buying a plot on a home loan can be a viable option if you plan to construct a house on the land in the future. A home loan can cover both the land purchase and the construction costs. However, it's essential to assess your financial situation and goals before making a decision.

Disadvantages of a plot loan may include higher interest rates compared to home loans, shorter loan tenures resulting in higher EMIs, and limited tax benefits.

Some lenders may offer the option to convert a plot loan into a home loan if you decide to construct a house on the land later. However, this conversion process may involve additional documentation and approval from the lender.

Whether you can get a 90% loan on a plot depends on the lender's policies and your eligibility. Some lenders may offer such financing, but it typically varies from lender to lender.

While it's uncommon to get a 100% plot loan, a few lenders might offer it in specific cases. However, it's crucial to have a good credit history and meet other eligibility criteria to qualify for such a loan.

Plot loans do not usually offer tax benefits, as these benefits are typically associated with home loans, where the property is constructed. Therefore, plot loans do not save tax.

Whether you should buy a plot or a house depends on your goals and financial situation. Buying a plot is a good option if you plan to invest in land or construct a house in the future. Buying a house may provide immediate accommodation but may not be the best choice if you have specific land-related goals.

Buying a plot can be a good investment if you expect the value of the land to appreciate over time. However, like any investment, it carries risks, and it's essential to conduct thorough research and consider factors like location, future development prospects, and your long-term goals before investing in a plot.

Published on 28th September 2023