Loan against property is a secured loan. Availing loans by pledging your property with a lender/bank is known as mortgaging or loan against property. Loan against property is a good option especially when the property rates are appreciating. The interest rate levied on loan against property is low as it is a secured loan. With loan against property, you get funds without having to sell properties.
You can pledge your residential and commercial properties under loan against property. You can even pledge a piece of land to avail loan against property. There are no restrictions on the purpose for which these funds are utilized. The payments can be made in EMIs and also, the loan against property is available under overdraft facility.
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This overdraft feature benefits small business owners and self employed individuals, as their requirement for capital is charged only on the utilized funds. Below mentioned are the key points to consider while availing loans against property:
SEE ALSO: Loan Against Property
As loan against property is a secured loan, rate of interest levied on LAPs are lower than personal loan. You will have to submit ownership documents of the property, at the time of signing the loan agreement with the lender. Loan against property is a good option over loans like vehicle loans and personal loans as the interest charged is lower. You can use the amount received from LAP to renovate your house, fund children’s education, buy your dream car and so on.
The loan amount sanctioned under loan against property would be 40% to 70% of your property market value. If you don’t have other options for getting funds, then you go for LAPs. Remember the point that you must hand over ownership documents of the property to the lender, failing which LAP would not be sanctioned.
Each bank has its own cap on the maximum loan amount that can be sanctioned under the loan against property. You must go for LAP only if you are looking for higher amount of loan as pledging your property for lower funds makes no sense. The lender would liquidate your property to recover unpaid dues if you fail to repay the loan.
The tenure of repayment for LAPs can be as high as 15 years, thereby giving it an edge over short term loans like car or personal loans. Longer loan tenure translates into lower EMIs, which enables you cover other expenses along with the loan repayment. However, note that: longer the tenure, higher will be the interest paid on the loan. Choose the loan tenure carefully or else you will end up paying more interest, unnecessarily.
Unlike education loans and home loans, there are no tax benefits under the loan against property. If you are looking to raise funds for education or home renovation, then education loan and home loans would be a better option as they offer tax benefits. One advantage of availing LAPs is that the funds received under LAPs can be used for any purpose, but the catch is there are no tax benefits.
The lenders would take longer time to process your loan application, as the loan would be sanctioned on the basis of your property. The lender would closely assess the value of your property. The lender would carry out a technical evaluation of the property and a maximum of 70% of the property’s market value would be sanctioned as loan against property. Apart from this, the lender would evaluate your loan repayment capabilities and would ask for income proof documents like latest three months’ payslips, bank statement, Form 16 and ITR. Therefore, opt to avail loan against property only if the funds are not needed within a month.
Just like other loans, lenders charge processing fee and prepayment penalties on loans against property. Most banks charge up to 1% of the loan amount while most NBFCs charge around 1-2% of the loan amount as processing fees. In addition, if you happen to foreclose your loan against property, then the lender would charge prepayment penalties that would be a certain percentage of the dues.
To summarize, LAPs have advantage over other loan options when it comes to rate of interest, loan amount and loan tenure. However, lenders require more processing time which makes LAPs a bad option to go for to raise emergency funds. One must opt for LAPs only if the loan amount required is high and you are not able to avail other cheaper credit options. You must know that by availing LAP, you are losing out on the ownership authority of the pledged property under LAP. You could lose the properties if you don’t repay the dues.
SEE ALSO: Interest Rate
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