The demand for Loans Against Property (LAP) has been soaring due to their secured nature and no end-use restriction. A LAP is a loan issued against an existing property by financial institutions, including banks, NBFCs, as well as HFCs. Loans against property trump all other loan types, including project loans, personal loans, or business loans, as you can get a higher amount of loan sanctioned at relatively lower interest rates.
In order to apply for a Loan Against Property sanction, you will need to take the following 7 factors into consideration:
1. Property Appraisal and Valuation
The loan amount sanctioned under a LAP would depend on how the lending institution values your property. The process usually entails a property appraisal to determine the current market value of the pledged collateral. This is generally followed by the bank or NBFC verifying the documentation to ensure that the property is freehold, fully constructed, and has a clear title. If the said property has co-owners, then it is desirable that they too partake in the LAP and meet the eligibility criteria.
If all goes well, the amount will be sanctioned at 50%-70% of the appraised market value, also known as the Loan-to-value (LTV) ratio. This LTV ratio would vary depending on the lender. For instance, an HFC is likely to provide a loan only up to 50-60% of the property’s market value. Remember that this valuation does not take into account any potential future value addition.
2. Interest Rates
Because a Loan Against Property (LAP) is a secured loan where you give property as collateral, the loan amount is offered at lower interest rates, vis-à-vis personal and business loans, which are unsecured in nature. The higher the loan security and the lower the margin amount sanctioned, the lower shall be the interest rate, as it reduces the probability of steep monetary losses for the lender in case of failure of repayment. Your interest payment outflows can be further reduced if the bank/lending institution offers overdraft facilities and credit limits on your LAP. In such cases, you end up paying interest only on the amount you actually withdraw, and not on the whole amount.
In addition, interest rates will also be determined on the basis of your income, credit history, and the policies of the institution that you end up applying to. A choice will also have to be made between floating and fixed interest rates. The former is usually a better choice, except when you expect an economic environment of continued interest rate raises. Thus, it is advisable to do your groundwork about the lending terms and interest rates offered by various financial institutions.
3. Processing Time and Fees
Every LAP sanction is subject to processing fees that are charged by the lending institutions as per their terms and conditions. It may range from anywhere between 0.5% to 3% of the sanctioned loan amount. This may either be charged upfront or maybe deducted from the principal amount after the loan sanction. Additionally, stamp duty charges and convenience charges for switching between interest rate structures may also be charged. You will also need to account for prepayment penalty and foreclosure fees to arrive at the real cost of the loan.
Furthermore, a LAP has relatively higher processing times, unlike personal loans, which can be processed within days. This is because the lenders need to scrutinise the property for any encumbrances and need to undertake a valuation process.
4. Loan Tenure and Repayment
Another factor to consider is the tenure of the loan. Typically, lending institutions offer loans for anywhere between 5-15 years. The term can be further extended to 20 years, provided it is completed by the time the applicant reaches their retirement. So, if you are a 40-year-old salaried individual looking for a LAP, you could be offered a loan with a tenure lasting 20 years, assuming you would retire by 60.
You will need to, however, strike a balance between the loan’s tenure and your EMI payments. This becomes even more vital if you have opted for a loan at floating interest rates, as the compounding effect would factor in as well. Even though a longer tenure results in spreading out payments over time, thus reducing the monthly EMI burden, it could also result in higher interest payments at an aggregated level. A shorter tenure is more suitable for overall savings on interest payments.
5. Tax Benefits
A Loan Against Property will usually not result in any tax savings, which is unlike the case for personal and business loans that offer deductions on interest payments. This is possibly why people gravitate towards home loans or educational loans, even if they come at higher interest rates.
But, a salaried individual can possibly benefit from interest deductions under section 24(B) of the Income Tax Act if the LAP amount is used towards the construction of a new residential house. If you are a business owner, then you may claim benefits under section 37 of the Tax Act.
6. Clear Comprehension of the Lender’s Eligibility Criteria
Every financial institution has its own criteria to judge your eligibility for a LAP. For instance, bank A may want you to be at least 25 years of age in order to sanction you a minimum of Rs. 50 lakhs loan, whereas bank B may require you to be 21 years of age, but may sanction an amount of Rs. 30 lakhs only. Therefore, it becomes imperative to shop around for lenders in order to minimise the chances of loan rejection. A loan rejection gets reflected in your credit report as a hard inquiry and may hamper your chances of availing of the required loan amount.
Also, you must look for a lender who offers quality services after loan disbursal, since it is a long-duration loan. Preference should be given to lenders offering speedy and seamless grievance addressal.
7. Credit (CIBIL) Score
Even though a LAP is sanctioned against your pledged property, this does not completely discount the need for a decent CIBIL score. So, a healthy credit score, usually over 750, will help you get your LAP sanctioned at low rates of interest and negotiate better terms and conditions with the bank. To improve your credit score, start paying your EMIs on time and make sure you don’t use more than 30% of any credit limit issued to you.
Bottom Line – Get LAP at attractive interest rates with Protium
The process for getting a LAP sanctioned involves consideration of a host of factors, such as interest rates, processing payments, and the loan’s tenure. Additionally, the terms of the loan are also impacted by the age, income, past payment track record, and the credit worthiness of the borrower. Hence, research and evaluate all the LAP lending options to check if they are in complete alignment with your long-term financial interests.
At Protium, you can get loans for all your needs at affordable interest rates with flexible repayment options through our easy-to-apply online application process. You can give us a call at 8828827800 to find out more!