Top Reasons Why a Loan Against Property Is the Best Option for Your Personal Need
By siliconindia | Friday, 19 November 2021, 06:17 Hrs
While all of us have a number of dreams and aspirations, many of these take a backseat due to the lack of funds. However, with a plethora of easily available financial solutions, a lot of these aspirations are now within reach.
When talking about reliable and widely available financial tools, the first thing that comes to mind is a loan against property (LAP). This solution does not limit the use of funds granted via the loan for any particular purpose. As a result, it can be easily availed of for a child’s education, sponsoring wedding expenses, expanding an existing business, or handling medical expenses, taking a trip around the world, and so on. This article will discuss elaborately what a loan against property and its benefits are.
What Is a Loan Against Property?
A loan against property, as the name suggests, is simply a loan availed of by pledging a property that the borrower legally owns. The property could be a house, non-agricultural land, or a shop.
Here, the lender offers the principal loan against property amount and charges interest on it, and the borrower can repay the loan in affordable monthly installments. The property serves as collateral and stays in the lender’s possession until the loan is fully repaid. In this manner, the lender gets a legal claim on that property during the loan tenor. If a borrower defaults in repaying the loan, the lender has the right to seize the property.
In this way, loan against property is a secured financing option, i.e., the loan amount is secured by the property. As a result, the interest rate applicable is relatively low compared to other unsecured financing options, such as a personal loan. This is because a LAP is a low risk investment for the lender.
Reasons Why a Loan Against Property Is the Best Option for Funding Personal Expenses
Now that what is meant by a loan against property is clear, let’s look at why a loan against property is the most appropriate funding option.
Extended Loan Repayment Tenor - Unlike any other type of mortgage, the tenor of a loan against property is typically longer. It may extend up to 18 years. Therefore, a borrower always gets sufficient time to make money and also repay the borrowed funds.
Reduced Interest Rates - Being a secured loan, a loan against property entails a low rate of interest compared to an unsecured loan like a personal one.
Low EMI - A borrower can apply for an extended repayment tenor of up to 18 years. So, a borrower always gets sufficient time to build up their savings, meet other financial requirements, and pay back the loan. Besides, it is easy to calculate the loan EMIs with a loan against a property calculator.
Zero or Low Loan Prepayment Charge - Per the RBI mandate, borrowers who have opted for a floating interest rate loan against property are not liable to pay an additional charge on prepayment or a loan foreclosure.
Funds Can Be Used for Any Purpose - One of the major advantages of a loan against property is that a borrower has the liberty to utilize the fund for various personal or business purposes.
Most mortgages in the financial market are limited to a particular purpose and cannot be utilized for any activity besides that. With a loan against property, the funds are sanctioned without any limitations on end-use. Usually, 50-60% of the market value of a property is granted. With the most appropriate borrower profile, it may even stretch to up to 70-75% in some cases. Besides, many lenders also allow borrowers to customize their loan against property in a way that suits their requirements.
Continued Ownership - A borrower can continue being the legal owner of their property while using the funds from a loan against property to fulfill their immediate financial needs.
Types of Loan Against Property Interest Rates
A borrower can pay off a loan against property by opting for a fixed or a floating interest rate. Let us understand what the two mean:
Fixed interest rate: As the term itself suggests, a fixed interest rate stays constant for the entire loan tenor. A borrower may be allowed to opt for a fixed interest rate if they opt for a shorter loan tenor. In case a borrower is seeking a longer tenor for a loan against property, they may not be able to avail of a loan with a fixed interest rate.
Floating interest rate: The interest rates of a property loan are based on the current market rates. A borrower cannot predict the rate of interest but get an impression of the current interest rate from a financial lender’s official website. This is a rate of interest that can change from time to time.
Lenders offer attractive mortgage loan interest rates, which makes repayment convenient. The mortgage loan interest rates for self-employed borrowers vary typically between 8.50% and 14.50%. However, for salaried borrowers, the loan against property interest rate is between 8.35% and 11.50%.
Steps to Apply for a Loan Against Property
A borrower can apply for a loan against property online or offline. If they wish to apply offline, they must visit the chosen lender’s nearest branch.
To kick-start the loan against property application online, a borrower has to fill the application form. It requires personal information and those related to the property being pledged.
These details need to be filled in correctly as they will be verified by the lending authorities.
- After filling the application, a representative from the lending institution is likely to connect with the borrower for verification. The credit score and profile are checked in this step. A loan against property offer is made based on successful verification. It is worth noting here that although in rare cases, some lenders may opt for a face-to-face verification process.
- Upon successful verification, the lender provides the loan against the property sanction letter. A borrower also gets to see the terms and conditions of the LAP loan at this stage.
- Once the borrower accepts the offer made by the lender, the second stage of verification gets initiated. This step is in place to ensure that the pledged property has the required value and is free of legal dispute.
- Once the second phase is over, the lender directly credits the fund to the borrower's bank account within 72 hours.
The Final Word
While applying for a loan against property, a borrower will need to furnish documents related to their identity, property being pledged, and income along with the duly filled application form. Based on the document verification and application fees processing, the terms of the loan are going to be finalized. The process may initially seem complicated. Financial experts recommend consulting a Relationship Manager from the lending institution to understand the process better.