It’s easy to feel overwhelmed when you are bombarded with information on various loan products offered by various financial institutions. A Loan Against Property is one such product, and we are here to deconstruct it for you.
When faced with a financial emergency, most people think of two options: selling their assets or getting a loan. While asset disposal can help meet needs without raising any additional interest expenses, it may throw your long-term financial planning into disarray. So, if the former is not an option, then you are better off opting for loans, such as Business Loans, Overdraft Limits, or a Loan Against Property, to name a few.
A Loan Against Property (LAP) is a simple solution that helps you utilise the locked-up value of your property while you occupy it. The end use of a LAP sanction is not restricted, meaning you can use the funds for meeting medical expenses, higher education, or simply debt management. Let’s deep dive into LAP to understand it better.
Defining Loan Against Property
A LAP, as the name suggests, is a secured loan issued by financial institutions against a property pledged as collateral. Such loans are usually provided by banks, HFCs, or NBFCs against pre-owned, fully constructed, and titled residential and commercial properties. Occasionally, a LAP may be extended by some lenders against a plot of land too.
The amount of loan extended would depend on the market value of the pledged property, commonly referred to as the Loan to Value (LTV) ratio. This ratio usually ranges anywhere between 50% to 70% of the property value. The quantum of loan sanctioned is also impacted by your income and credit score.
The loan taken can be repaid via EMIs. The interest rates offered on a LAP, along with other procedural charges, are some of the lowest compared to other loan types.
Properties Eligible for a LAP
A LAP is usually offered on the following property types:
- Residential properties: Individual houses, flats, or apartments.
- Commercial properties- Malls, shops, or office buildings.
- Industrial properties- Factories, warehouses, or processing units.
- Non-agricultural land.
However, loans may not be sanctioned if your property needs extensive repairs and is old or dilapidated. Additionally, residential properties which house a tenant for longer than five years without renewal of rental agreements may also face rejection.
You might be wondering how a LAP is different from other types of loan, say project loans or business loans. Let’s find out.
Difference between Project Loans and Business Loans?
In a project loan, the project itself is mortgaged to the lender along with other supporting securities. On the other hand, business loans are generally unsecured. They are sanctioned at high-interest rates, based on the applicant’s financial stability, which doesn’t factor significantly in availing of a LAP since it is backed by collateral.
General Eligibility Criteria to Qualify for a LAP
The eligibility criteria for availing of a LAP varies as per lender requirements. However, some common factors include the applicant’s employment status, whether self-employed or salaried, savings amount, repayment track record, and a decent (750+) CIBIL score.
Usually, lenders prefer extending LAP to customers who can repay their loans before retirement. This typically translates to 60 years for a salary-earning individual and 65 years for businessmen and self-employed professionals.
Why is a LAP a Good Idea? – 8 reasons to know
If you happen to be an owner of a fully constructed, litigation-free property, then applying for a LAP is a viable option. Its benefits include:
1) No end use restriction
LAP can be utilised for any legitimate purpose, be it for business expansion, home refurbishing, meeting education and medical expenses, or debt management.
2) Maximum tenure
A LAP can be availed for a tenure ranging anywhere between 5-15 years, with the term not extending beyond your retirement age. Please note that a longer tenure will result in higher aggregated interest payments, so plan accordingly.
3) Lower rate of interest
A LAP can be secured at a significantly lower rate of interest, as it is backed by collateral. The interest charges can further be reduced if the banks extend the LAP with an overdraft facility. Furthermore, you can even choose to pay interest at fixed or floating rates. It is better to opt for the former only if you expect the interest rates to continue to rise in the future.
4) Large sums of money
Since the LTV (Loan-to-Value) ratio can be anywhere between 50-70%, a high-value property can fetch you a huge sum of money for investment.
5) Lower charges
A LAP is typically sanctioned at lower processing fees and pre-payment charges than other loan types.
6) Refinancing facility
If your property significantly appreciates over time, then you can make use of the refinancing facility. This allows you to top up your current loan, i.e., increase the amount that you have already borrowed against your property, with fewer formalities.
7) Continued use of the property
Despite the rights of the property being transferred to the lender over the term of the loan, you can continue to occupy and use your pledged property. You can even lease or rent it out to earn additional income.
8) Tax benefit
Tax benefits can be availed on interest deductions under section 24(B) of the Income Tax Act if you are a salaried employee, assuming the loan amount is used for the construction of a new residential house. If you end up using the loan for business, then you can claim benefits under section 37. However, there are no tax benefits for other end uses, such as meeting expenses of marriage, education, health, etc.
The Downside of Loans Against Property
Although a LAP is an excellent option, the grass is not all green. If you default on payments, the lender is free to sell the property to recover their dues, as the legal rights over the mortgaged property get transferred to them at the time of the loan sanction. This makes it a risky affair, especially if you own only one property.
Bottom Line – Avail LAP now with Protium
Your property can be the golden ticket to help realise your dreams if you choose to unlock its value by availing of a LAP. Do your research by comparing the terms and conditions offered by various lenders before zeroing in on one, as it is a long-term commitment.
At Protium, you can get a Loan Against Property at affordable interest rates with flexible repayment options. Just call 8828827800 to apply for a loan at Protium to achieve all your financial needs.