Life is all about seizing the moment. A business needs to be started at the right time. Paucity of funds can be a serious dampener to the starting of a business. This is where loan against property comes in handy. This kind of loan helps in procuring funds needed in an emergency as well as for personal and business needs. The entrepreneurs of small and medium enterprises fuel the demand for the loan against property.
What is meant by a loan against property?
This kind of loan is taken against one’s residential home or apartment or a commercial building. One can borrow against the property by pledging it and the loan is sanctioned based on the value of the property and the capacity of the borrower to repay the loan. Since collateral namely the residential house is available against this kind of a loan it is called a secured loan .This enables one to get a higher quantum of loan than a personal loan which is unsecured in nature. The value of the property might appreciate with time and refinancing the property can be an attractive option. One needs to be careful while taking a loan against property as failure to repay the amount can result in the seizing of the pledged property. This kind of loan is generally taken when the borrower does not have any other means to procure financing and the banks deem this kind of loans to be risky and charge a higher interest rate than a home loan.
What is the eligibility criteria of taking a loan against property in India?
- Salaried Corporate and Government employees, Consultants, NRI’s, Proprietors, Partnership Companies, Professionals such as doctors ,chartered accountants, Private limited Companies and HUF’s are eligible for taking such kind of loans.
- If there is more than one owner to the property all of them need to be joint applicants to avail the loan. Banks insist on an encumbrance certificate which is proof that the pledged property is free from monetary and legal liabilities. The title of the property needs to be clear.
- Banks generally lend an amount equal to about 50-60% of the value of the pledged property.
- These kinds of loans are generally sanctioned for borrowers of a minimum age of 21-24 years and the maximum age can be around 60 years for a salaried employee .For a self employed borrower the maximum age can be 65 years of age.
- Some banks demand a minimum work experience of 1-5 years for salaried employees and the self employed individual needs to be in business for at least 2-5 years.
- Banks demand an identity as well as a residence proof, 6 months bank statements, salary slip or form 16, copy of the property documents for salaried employees. Self employed businessmen need to present 3 years financial statements in addition to the above.
- The loan processing charges are about 1-2% of the loan amount sanctioned. The prepayment charges are in the range of 2-3% of the outstanding principal if the loan is prepaid between 6 months to 5 years.
- Interest rates on a floating basis for a loan taken against property are in the range of 12-14% per annum. The fixed interest rate loans are in the range of 12-16% per annum.
- The tenure of repayment of these loans is 1-10 years which can be extended to 15 years.
- Past credit history plays a very important role in getting the loan against property sanctioned. The Cibil score plays a very important part and if the borrowers past credit history is poor the loan is liable to get rejected.
- The minimum quantum of loan sanctioned is around INR 2-3 Lakhs. The maximum quantum of loan sanctioned can be around 2-3 Crores.
Why does one need to take a loan against property?
- In this day of advanced technologies medical treatment can be very expensive. This type of expensive treatment demands immediate funds and loan against property serves to bridge this gap.
- Marriage expenses can be quite high and tend to be immediate in nature. The loan against property serves to cater to this immediate need.
- Studying in foreign countries can be very expensive and funds can be arranged through this method.
- Starting of a business and expansion of a current business can be funded through a loan against property.
- A long pending dream vacation can be funded through a loan against property.
Which is better a personal loan or a loan against property?
The rate of interest charged on a personal loan can be in the range of 16-22% as it is unsecured in nature. The interest rate charged for a loan against property is 12-16% as it is secured in nature and one pledges the residential house as collateral. The lower rate of interest makes a loan against property an attractive option when compared to a personal loan. The tenure of repayment of a personal loan can be 1-5 years when compared to a loan against property which is 1-10 years. A longer tenure aids in more comfortable repayment. The loan processing charges and administrative charges are 1-2% of the value of the loan. This could be as high as 2-3% in case of a personal loan.
What is the advantage of taking a loan against property in India?
- If one requires a huge sum of money running into Lakhs of rupees then one can avail of a loan against property. This is one of the easier methods of raising finances in order to settle immediate needs .Businessmen running small and medium sized businesses use this method to raise funds for expansion.
- Interest rates are cheaper in loans against property than many other alternatives except home loans. The residential home continues to be in the name of the borrower and income can be earned from it. In case the borrower is not able to repay the amount the residential house can be sold and the proceeds used to repay the pending debt.
- The processing time of a loan against property is lesser than that of a home loan as the property already exists.
- Many a time the cost of land or a residential apartment appreciates with time .This opportunity can be used to refinance the loan against property. A businessman who continuously expands his business can use this method to finance his business needs.
- A businessman can avail tax exemptions on the interest component of these loans if he can prove that these loans aid him in the development of his business.
What is the disadvantage of taking a loan against property in India?
- In India the residential house or the family home is regarded as too precious to be mortgaged .People are reluctant to pledge so valuable an asset to raise funds as they fear that if they are unable to repay the loan due to factors which may or may not be in their hands they would lose a highly prized possession.
- The quantum of loan sanctioned is around 50-60% of the value of the property. There are other alternatives which are deemed to be better than this approach.
- This kind of a loan is a strict no for those who have a problem managing their debts and finances. Since this loan is secured the chances are it might be approved. This puts an extra onus on the borrower to repay the loan.
- Lenders carry out the evaluation of the property and value it at a lesser value than the actual current market rate. This reduces the quantum of loan sanctioned.
- These loans are fraught with risk for the lender as property title and other papers are sometimes falsified.
I would like to end this article stating that although these loans are available at attractive interest rates caution is the watchword while applying for these loans .If one has doubts on his repayment capacity then these loans are strictly untouchable. One has to exercise ones judiciousness while availing of a loan against property.