Is Loan Against Property a Good Idea? Here’s What You Need to Know…
September 24, 2021 Mutual Fund
When faced with a financial emergency, most people usually think of either redeeming their investments or availing of a loan. While redeeming your investments can save you money on interest payments, it interrupts your long-term financial goals. Although a loan can be a better choice in case of a financial emergency, choosing the right type of loan can be confusing with so many options available.
Since there is a higher awareness about unsecured loans and they can be availed of easily, people do not consider other options that could be better and blindly avail it. However, the rate of interest charged on unsecured loans is usually very high, and the amount offered can be insufficient for your requirements.
When looking at the various loan options available, people often do not realise that there is a value locked up in their property! Yes, a Loan Against Property can be a good idea when you need to borrow large sums of money.
What is a Loan Against Property?
A Loan Against Property, popularly known as LAP, is a type of secured loan that you can avail of by keeping a residential or commercial property as collateral. The primary requirement you must have for the loan to be approved is that the property should be freehold and fully constructed. However, some lenders offer a LAP even against a plot of land.
A Loan Against Property is considered a simple solution for your financial needs because it allows you to use the locked-up value of your property while continuing to enjoy its occupancy. Moreover, the rate of interest on a Loan Against Property is comparatively lower than an unsecured loan. It is offered by almost all the banks, housing finance companies, and Non-Banking Financial Companies (NBFCs) in India.
Why is a Loan Against Property a good idea?
If you have a fully constructed residential or commercial property without any other encumbrances, a Loan Against Property is the best option compared to any other type of loan. It offers large sums of money for a lower rate of interest as the loan is secured by the collateral, your property. Some banks also provide a LAP with an overdraft facility. In this way, you use only the required amount of money from your sanctioned credit limit and pay interest only for the amount you have utilised.
What are the benefits of availing of a Loan Against Property?
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No restriction on the end use:
A borrower can utilise the Loan Against Property for any purpose as long as it is legitimate. So, just like a personal loan, you can utilise it for your child's education, home renovation, child's wedding, medical expenses, business expansion, debt management, etc.
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Lower rate of interest:
The rate of interest on a Loan Against Property ranges between 8.50%-13%, which is comparatively lower than unsecured loans such as personal loans. The interest rate on LAP depends on the value of a property, loan amount, and your ability to repay the loan. Additionally, a borrower can choose between a fixed interest rate and a floating interest rate. It is advisable to opt for a fixed interest rate only if there is higher possibility of interest rates continuously increasing in the future.
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Maximum loan tenure:
A Loan Against Property can be availed for a longer loan tenure of 5-15 years. So, if your fixed monthly expenses are high and/or you are already paying higher EMIs on other loans you may have, you can opt for the maximum loan tenure of 15 years to reduce your EMIs. However, a borrower needs to remember that a longer loan tenure period equates to paying higher interest.
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Large sums of money:
The lenders typically offer a loan amount of 50%-70% of the property's current market value. This margin ensures that the lender is prepared for any fluctuations in the real estate industry. So, if you have a high-value property, you can borrow a larger sum of money on it.
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No credit score check:
Most lenders do not check the credit score for Loan Against Property since it is backed up by property, making a LAP the best choice for people who do not have a credit history or good credit score. However, depending on their policies, some lenders may require an average credit score to approve the loan.
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Quick and easy process:
As the Loan Against Property is a mortgage loan, it does not have stringent eligibility criteria. However, an applicant must have a freehold residential or commercial property in his/her name. Once you, the applicant, submit all the required documents to the lender, such as a copy of your identity proof, address proof, property documents, income proof, etc., along with a duly signed application form, the bank or NBFC processes the loan immediately after verifying the documents.
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Lower charges:
A Loan Against Property typically has a lower processing fee and pre-payment charges compared to other types of loans. Therefore, one needs to compare the auxiliary charges of various lenders before applying for this type of loan.
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Refinancing facility:
As the value of the property increases over time, a borrower can increase the amount of his/her loan. This facility is known as refinancing. Refinancing allows a borrower to get the maximum benefit of a property as collateral. In addition, since it is similar to a top-up loan, it requires fewer formalities.
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Continue the occupancy:
Since it is a mortgage loan, the rights of the property are transferred to the lender. However, a borrower can still continue to occupy the mortgaged residential or commercial property. Moreover, a borrower can also lease / rent out the property to earn an income from it.
What are the disadvantages of availing of a Loan Against Property?
In India, people are emotionally attached to their property, and, hence, they are usually reluctant to mortgage or sell it for funds. The major disadvantage of availing a Loan Against Property is that all the rights over the mortgaged property are transferred to the lender. In case a borrower fails to pay the EMIs or defaults on loan, the lender can sell the property to recover the due amount. A lender can also claim any remaining dues from the borrower after it has sold the property. Hence, if you have only one property, it can be risky to put your house up as collateral.
To Conclude:
If you need large sums of money for business or personal reasons, and own a property that qualifies for a Loan Against Property, it is advisable to consider availing it, since the interest rate and EMIs are lower than other loans, and the loan process is quick and hassle-free.
However, a borrower should only consider availing of a Loan Against Property if he/she is confident about their repayment capacity, as, in case of a default, the lender holds the right to sell the property to recover dues. Hence, it is not advisable to stake your primary property or home for a business requirement that involves a lot of risk. Additionally, before applying for a loan, check and compare the interest rates, charges, margins, etc. with multiple lenders. This will help you make an informed decision as a LAP is generally a long-term commitment.
This article first appeared on PersonalFN here
