A loan against property (LAP) is exactly what the name implies — a loan given or disbursed by mortgaging property. The loan is given as a certain percentage of the property's market value, usually around 40-60 per cent. It belongs to the secured loan category where the borrower provides a guarantee by using his property as security.
The borrower can either opt for an overdraft option where he is required to pay interest only on the amount withdrawn or a lump sum loan amount. The disadvantage of an overdraft facility is that the interest rate charged may be higher, in some cases up to 0.5 per cent and also annual processing fees will be charged. Additionally, only banks can offer the overdraft facility as other financial institutions do not offer savings/current accounts.
In case of a lump sum loan, processing fees are charged only once when the loan is taken and also the individual can approach either a bank or financial institution for the loan.
Long tenure loans: For individuals requiring funding for a long period of time, LAP can come very handy because the tenure of these loans can be a maximum period of 15 years.
Large Loan amount: Individuals requiring substantial funds also should consider this option as a large loan is possible. Of course it depends on the property value. There is no restriction as in case of personal loans where the maximum loan permissible is Rs 10 lakh.
Lower rate of interest: On account of the house being the collateral, the rate of interest charged by banks tends to be much lower than personal loans.
You can normally take a loan against your self-occupied or rented residential property. This could be a house or even a piece of land.
The eligibility criteria will vary from one bank to another. However, of all factors, the most common are:
Your income, savings and debt obligations, if any
Cost or value of the property that is mortgaged
Your repayment track record for other loans such as personal loans, credit cards etc.
Interest rates on loan against property range from 13-16 per cent and the loan tenure can be up to 15 years.
PROS & CONS
The advantages broadly are:
1. An idle asset can be utilised to aid financial comfort.
2. Loan processing is comparatively faster than a housing loan.
3. You can prepay this loan without any penalty. By prepaying whenever possible you can bring down the cost of credit (some banks permit a minimum part payment of Rs 5,000 most start at Rs 10,000).
4. You can increase the borrowed loan amount through a refinance option, when property value rises. This is particularly useful for expanding a growing business.
5. You will retain property ownership. In the event of being unable to repay the property can be sold to settle the dues with the surplus cash allowing one to start afresh. This can been a boon in case of a financial crisis, as property value generally moves on the upward trend, providing you a platform to rebuild your finances.
There are a few disadvantages:
1. Banks generally do not provide loans beyond 60 per cent of the value of a house property and 50 per cent of the value for a commercial property.
2. New businesses generally cannot have access to LAP. They should have been in existence for at least three years. Salaried individuals of course can get it if they are employed for over 1 year itself.
3. Some banks could ask the borrower to get the encumbrance certificate and legal opinion ourselves and charge us lesser processing fees.
A loan against property is one of the best ways to raise money. Of course the most obvious disadvantage is losing your property in a bid to repay the loan. Hence, base your decision on your repaying capabilities.
Tags: Loan against Property, Loans against Property, Property Loan